What is the value of income only shares?

Shares with a right to income only - how would you value?

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A trading company in the healthcare sector is worth £1.5m. £1m comes from cash and short term deposits, the other £500k is goodwill.

Director/owner wants to set up a separate company to deal with investments, so that the funds are ringfenced, protected from any claims in trade co, and avoid tainting the availability of entrepreneurs relief.

Plan is to reorganise trade co’s shares into A and B shares, B shares having dividend only rights. B shares will make up 25% of ordinary share capital.

Investment co will then be setup and will issue shares to director/owner in exchange for his B shares in trade co. Quite comfortable that TCGA 1992 s135 will apply to this for CGT purposes.

Question relates to stamp duty – what would the value of income only shares be for these purposes?

I’m assuming the value of the shares issued in investment co will correspond to the value of shares being acquired from trade co.

There’s no guarantee of dividends being received on these shares, so there is a temptation to value at close to nil.

However in reality, once it all goes through, most of the £1m cash will be taken to investment co, and any excess going forward as well. Would that have to be considered in the value?

I would appreciate any thoughts you have on this?

Replies (5)

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By Tax Dragon
16th Aug 2018 20:11

Close to nil sounds right - I mean how much would you pay for them?

Have you thought about possible tax issues subsequently when the big bucks pass?

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Replying to Tax Dragon:
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By KevinMcC
17th Aug 2018 09:13

That's where I'm swaying. If someone offered me income only shares, with no guarantee of a dividend, I'd not be offering much for them.

It's only because I know what is going to happen once everything is set up that I am questioning the value.

What subsequent tax issues are you referring to?

The dividends will be tax free for the investment co. The client will be made aware that putting the funds into an investment company removes the possibility of any entrepreneurs relief (whereas if the funds remained a claim could be made, albeit with a fair risk of challenge). Obviously cash extraction from investment co. will be considered, but the funds will likely remain within the company for the foreseeable future.

(Is this the part where you point out the really obvious thing I have forgotten?)

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Replying to KevinMcC:
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By Tax Dragon
17th Aug 2018 10:32

Well there are various potential tax trigger points in your plan. By that I just mean potential issues that you need to consider. You might decide that that they are not issues at all, you might decide they can be planned away, or you might decide they are problematic. The point isn’t whether they actually are issues – it’s whether you have thought about them.

Just work through each step. Start with the reclassification. Don’t assume this comes within ChII PtIV TCGA – check. Check through each step to make sure it will be treated as you anticipate. That’s the easy bit which you’ve already done (but about which we can be pretty sure Mrbailey will be posting a pointless question when he starts on Module 4!)

Also, follow the money and the value and consider when these change. Generally, there are rules that treat movements like transactions. For example, changing 25% of the shares to ones which you have agreed are pretty worthless indicates a movement of value. Is the loss of value on the 25% caught by TCGA s29? Is the increase in value of the other 75% taxable under ERS rules? Skipping past the reorganisation, value then moves the other way when the money moves across – same questions. The transactions involve securities. Have you considered relevant anti-avoidance? And so on.

To repeat, I’m not saying there are charges. But if you are advising, you’ll need to cover off the angles, if you haven’t already.

I’m sure you know HMRC is upping its game. You don’t want HMRC spotting issues that you haven’t even thought about.

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Replying to Tax Dragon:
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By KevinMcC
17th Aug 2018 11:45

Thanks for the detailed response Tax Dragon.

I had considered the rules in s29, and had come to the conclusion that whilst a strict reading of that part suggests that the rules apply, it doesn't make sense where the person the value has shifted to is the same person. Yes it creates a notional disposal, but then the notional disposal would follow the same principles as a normal disposal, i.e. if he was shifting value to his wife, then there'd be a non gain no loss transaction. Along the same line, a person can't dispose of something to themselves, and so whilst the s29 rules may apply, they apply in such a way that they create a nothing essentially, a notional disposal that isn't a disposal, if that makes sense.

I hadn't thought much about the ERS implications. I have assumed that it'll qualify for the exemption for transactions made in the normal course of personal relationships. I will have a further think about this point to make sure there is nothing that may trip us up.

Could dividends declared in the future be caught by s29? I don't think so. For s29 to apply, value has to shift from one class of share to another in the same company. This has already been done by the previous transaction. The dividend is a separate transaction which won't trigger s29.

I've also considered s30 and s31, and concluded that the original share reclassification won't be caught by them (can only see s29 applying to that part), and have also concluded that the subsequent dividends also don't trigger it as these wouldn't be disposals for CGT (notional or otherwise).

Transactions in securities legislation has been considered. The owner won't receive any cash from the company, and there is definitely not a desire to obtain an income tax advantage with the transactions, so I am comfortable on that point. The only minor tax driver is protection of entrepreneurs relief, but the asset protection and separated administration of the trade and investments are the primary drivers here.

Thanks again for the response. I'll have another detailed think just to make sure I'm covering all the issues.

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Replying to KevinMcC:
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By Tax Dragon
17th Aug 2018 12:29

I would suggest that you may have to suspend common sense a bit more in interpreting legislation – it says what it says. If you find yourself saying “this can’t have been what Parliament meant” (or “whilst a strict reading of that part suggests that the rules apply, it doesn't make sense”) then you can’t just substitute what you think it should say. You might, if there is lack of clarity in the law, be able to appeal to purpose – but be conscious that that is what you are doing (and stop assuming so much).

Also, in the interval (however short) between a dividend being declared and being paid/received, where does the value lie if not in rights over the company that has just declared it?

Beyond that, I apologise, but I’m not going to get drawn too deeply into a discussion about the correctness or otherwise of your analyses. I am though pleased that you have done them. With the sort of money in question that you are talking about, it would indeed be worth rechecking every step, and checking it thoroughly.

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