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What is a loan note in relation to sale of company

What is a loan note in relation to sale of company shares?


Not sure if this is a terminology quesiton or a tax one.

Client sold his company in March 2017 to another company. Received cash plus earnout. Earnout(s) (multiple of profits in subsequent years) to be paid by receipt of loan notes in the buyer AT THE FUTURE dates.  ie March 2017 he will receive a loan note in buyerco equal to 130K which is to be redeemed quarterly over 2017/18, in March 2018 he will receive another loan note equal profits for the later year, 2019 etc.

My concern is whether I need to get into the tax on loan notes, securities and s138A or - as I think - these "loan notes" are just the lawful way of quantifying the indebtedness for the next 12 months.

However, surely the above scenario is to quote "a vendor exchanges his old shares for the right to future consideration in the form of loan note means s138A will apply".

I think it's unascertainable deferred - taxed in 16/17. BTW


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By Ruddles
13th Jan 2018 18:43

You seem to be contradicting yourself - you suggest that s138A is in point (which, absent an election to the contrary, means that no gain arises at the time of the disposal) but consider there to be a gain in 2016/17.

You will also need to consider whether QCB or non-QCB status of the loan notes is important.

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to Ruddles
13th Jan 2018 19:42

Thank you Sir. I'm not disputing any contradiction. I wasn't attempting to get into the s138 bit necessarily.
My point is whether the client has actually received loan notes or not?
Client is receiving a promise of money. This promise will be quantified at various stages and "loans" issued on the anniversary. My question I suppose is - if, in March 2017, 2018 etc, they were then given cash in full - at each date - then that wouldn't be a loan note would it?

At completion the client doesn't own any loan notes in the buyer as such. Am I being dense?

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By Ruddles
to HeavyMetalMike
13th Jan 2018 20:12

HeavyMetalMike wrote:

My point is whether the client has actually received loan notes or not?

I would say that if the agreement says that he is going to be given loan notes then, assuming that he is in fact given loan notes, he will have been given loan notes.

The whole point about s138A is to treat the earn-out as a security for share-for-share exchange purposes - where the earn-out consists of a right to receive shares or securities at some later date. Client is not receiving a promise of money - he is receiving a promise of loan notes. If he was receiving a promise of money, s138A would not be in point. The subsequent redemption of those loan notes is a separate matter - the tax consequences of which may depend on QCB/nQCB status.

So, in answer to your last question, I would say that the answer is "yes".

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