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w/o loan notes on share4share ...

what should my reserves look like?

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Some years ago, the owners of S did a share4share transfer to new holdco H, to create loan notes on the sale (I'm not entirely sure why this works & what the process is, but I'd like to know ...).

My client has now purchased H. It's been agreed that the o/s loan notes in H be w/off. I'm struggling a little with my jnl entries though ...

Starting TB is

Dr Investment £1m

Cr loan notes £300k

Cr Interco £199k

Cr shares £20k

Cr Share Premium £480k

Cr P&L £1k (loan note interest v divs from S) 

I obviously want to Dr the loan notes, but do I have to Cr P&L? Because of the nature of how the creditor came about, I want to Cr investment  and/or do something with share premium.

I think that I'm confusing myself because I know that the £1m investment is going to be impaired to £nil in next year's accounts.

Am I right this in these accounts I should Dr loan, Dr P&L, then next year Cr investment, Dr P&L and the share premium accounts will just remain on the Balance Sheet forever?

I don't know why I'm struggling with this so much!?!?!

Neartly forgot - FRS102s1A

Thanks

Replies (8)

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Psycho
By Wilson Philips
21st Sep 2020 20:41

I don’t see that the share premium is if any relevance. There are outstanding loan notes of £300k which the holders now apparently want to cancel. Regardless of the wisdom of such course of action, or the tax treatment in their hands, the corporate position is straightforward - taxable credit of £300k.

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Replying to Wilson Philips:
ALISK
By atleastisoundknowledgable...
21st Sep 2020 20:50

My client wants to take the view that the £1m shouldn't have been £1m and that it was overstated. He wants to 'adj' the initial entries, basically reducing the investment by the o/s loans.

He's going to love the fact that he has to pay tax.

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Replying to atleastisoundknowledgable...:
Psycho
By Wilson Philips
21st Sep 2020 21:13

My clients want to take the view that they shouldn’t pay any taxes. How do I advise them?

Did your client take advice before purchasing H?

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Replying to Wilson Philips:
ALISK
By atleastisoundknowledgable...
21st Sep 2020 22:03

Wilson Philips wrote:

Did your client take advice before purchasing H?

It went something like
Me: “are you sure, you know there’s these loans...”,
Client: “yeah, but don’t worry about those, it was some sort of tax thing their accountant did and it was overvalued anyway”,
Me: “yes, but...”,
Client: “don’t worry about it, we’ll argue against it”
...[months later when talking about the upcoming restructure]
Client: “this is what you were saying about the loans isn’t it”
Me: “yes”
Client: “I should’ve listened to you at the time”
Me: “...”

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Replying to atleastisoundknowledgable...:
Psycho
By Wilson Philips
21st Sep 2020 22:12

Well, since I don’t know the first thing about what went on I’ve nothing much to add.

However, I assume that the price paid for H reflected the outstanding indebtedness to the shareholders. If they’re now willing to write off that debt he will be “up” to the tune of £243k (less tax on extraction). He really shouldn’t be too annoyed about the CT charge.

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avatar
By johnt27
22nd Sep 2020 08:42

Are you sure the loan notes relate to the previous owners of H. It's not usual to structure a share for share with loan notes unless you are trying to give a pre-existing shareholder (in S) a route to exit but can't pay them for the full value of shares at the time.

If it were me I'd want to see the paperwork from the above before advising my client and doing any write offs etc

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Replying to johnt27:
Psycho
By Wilson Philips
22nd Sep 2020 09:10

Agreed. We’ve done a few of those. But I don’t think that the identity of the loan note holders should make any difference to the accounts and tax analysis.

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Replying to Wilson Philips:
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By johnt27
22nd Sep 2020 10:13

Don't disagree, my point was more to do with if it's the existing shareholders saying write off the loan notes, which aren't due to them, that's an interesting problem to resolve :)

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