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Treatment of 'goodwill'

What happens to cost of shares in subsidiary, when subsidiary's trade is hived up?

Dormant company buys 100% shares in another company. The cost is recorded as an investment. The trade of the new subsidiary is hived up, such that the subsidiary is now dormant and the previously dormant holding company is now trading.

What happens to the cost of investment? Do we apply fair values in acquisition accounting to account for goodwill and then write off the cost of investment?

Any ideas appreciated?

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13th Feb 2018 13:29

The cost of investment is impaired.

Eg, Buy shares for £100,000.
Then a few months later hive up trade for (say) notional £100,000, of which £50,000 is goodwill.

Parent has Investment of £100k and goodwill is £50k. Intercompany creditor of £100k.
Sub has intercompany debtor of £100k.
Sub dividends £100k away.
Sub is now worthless.
Parent impairs £100k investment.

Parent P&L has £100k dividend received and £100k impairment to nicely cancel.
Sub P&L has £50k gain on disposal and £100k dividend declared.

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to thevaliant
13th Feb 2018 14:28

I agree with all the above except the first sentence, which risks being misunderstood as saying that the investment is impaired by the hive up. It is not (provided full value is paid for the assets transferred). It is impaired by the dividend - provided the subsidiary has any profits to pay one out of, which it may not have.

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to johngroganjga
13th Feb 2018 18:07

Technically yes you’re right, but potato potarto, the subsid ends up with c£nil Balance Sheet & is worthless.

At right angles, but why do clients insist on calling subsids ‘children’ just because the parent is called a parent. !?

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to atleastisoundknowledgable...
13th Feb 2018 18:20

Well, they are all sisters.

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14th Feb 2018 11:39

What would happen to the base cost of the shares for tax purposes if the business was subsequently sold?

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By Ruddles
to alltaxedout
14th Feb 2018 11:59

Come again?

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to Ruddles
14th Feb 2018 12:09

Trade is hived up to parent. If parent then sells the trade in the future, how can it get relief for the cost of the original acquisition of shares in the now dormant subsidiary?

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By Ruddles
to alltaxedout
14th Feb 2018 12:23

If the parent sells the trade, what makes you think that it should get relief for the cost of acquiring something else?

Facetiousness aside, the parent should be entitled to relief for the base cost of the trade and assets that it acquired on the hive-up. As far as the sub's shares are concerned, they're now a tax nothing. Until recently, the parent could have waited for 6 or more years and claimed negligible value (or actually disposed of at a loss) - but that facility has now been removed.

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to Ruddles
14th Feb 2018 12:50

So, just to clarify, by

Ruddles wrote:

the base cost of the trade and assets


you are not talking about anything that the parent has paid. You are talking about the amount that is deemed to have been paid by virtue of TCGA s171(1).
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By Ruddles
to Tax Dragon
14th Feb 2018 12:56

Correct - as far as chargeable assets are concerned.

But possibly also CTA 2009 s775.

Not to mention provisions relating to plant and equipment, stock etc.

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to Ruddles
14th Feb 2018 13:05

It's almost as if the parent stood in the shoes of the sub.

Now it's me that's sounding facetious... but actually, I can see why the OP is scratching his/her head and saying "well what about the £100,000?"

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By Ruddles
to Tax Dragon
14th Feb 2018 13:42

What about it?

Let's say P buys S for £100k. S has nothing on its balance sheet so the £100k represents goodwill. Goodwill is then hived-up by foul means or otherwise to P. P's tax base cost is, let's say, £0. P sells goodwill for £100k -> CT £19k.

The problem seems to be that P gets no relief for the £100k it paid for S. So what? If the hive-up had not happened and S sold the goodwill on the market, it would have had the CT charge of £19k. The moral of the story - when acquiring shares in a company, be aware of latent tax charges. With its eyes wide open in this case, P ought to have sought a discount to the £100k asking price.

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to Ruddles
14th Feb 2018 14:34

I better say I wasn't trying to trick you either :)

In fact, I think your answers here to me and below to Portia together make an excellent and complete explanation for which I hope the OP is grateful.

(I'm sure it won't be long before the same issue gets asked about again though. It's one of AWeb's repeaters.)

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to Ruddles
14th Feb 2018 13:20

Ruddles wrote:

As far as the sub's shares are concerned, they're now a tax nothing. Until recently, the parent could have waited for 6 or more years and claimed negligible value (or actually disposed of at a loss) - but that facility has now been removed.

Could you talk a simple pig through this please?

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By Ruddles
to Portia Nina Levin
14th Feb 2018 14:05

P buys S for £x. S dividends (or otherwise) its trade and assets, leaving it worthless. So, on disposal of S or negligible value claim, there is a capital loss. But the hive-up is likely to fall within s176. For a few years, the application of s176 was limited to relevant transactions within the previous 6 years - which meant that if you waited for 6 years before disposing of the shares or making a negligible value claim you could recognise an unrestricted capital loss.

OK, so the legislation has yet to be amended, but there's no reason to suspect that the 6-year time limit will not be removed - as planned - for disposals (or claims) made after 21 November 2017.

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to Ruddles
14th Feb 2018 14:16

Nope. Wasn't trying to trick you. I'd missed the change to s 176, and thought you'd taken something from the SSE changes (which I was then also missing), and hadn't considered s 176. It's relevant to something I advised on recently, but your comments gave me a brief panic attack.

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By Ruddles
to Portia Nina Levin
14th Feb 2018 14:30

I'm glad that it was brief.

The SSE changes are not entirely irrelevant - widening the scope of the exemption and thus widening the scope of 'exempt' losses.

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14th Feb 2018 15:15

Many thanks!! I appreciate the responses and it all makes sense. Dare I say, it has been fun too!

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