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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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?
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.
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.