How will you achieve CGT treatment on a share buyback?
Normally, on a company purchase of own shares, the purchase price is split between an income element and a capital element. The capital element is just the amount paid when the shares were first subsribed - the remainder is all treated as a distribution.
You can get CGT treatment for the entire sum: see this article:
2. The right to further consideration - an overage (if it were shares it would be an earn-out right).
Both 1 and 2 are the "sale proceeds in the CGT computation. You need to value the overage right in 1.
The right in 2 is another asset. When you receive payments for this, you are treated as having made a part disposal for CGT purposes.
This is a pure CGT treatment and this is what I understand is normally the case when someone sells land and receives part of the payment as "slice of the action."
Now the developer - he usually buys land with a view to selling on - a "quick profit" - and he is treated as trading for tax purposes. His profits/gains are all treated on income account.
BUT that doesn't mean that the person who sold the land is treated as trading. Just think - a person holding the land for investment purposes sells it to a developer. Why should his tax treatment be affected by what the buyer is going to do with the land?
The overage is part consideration for the sale of a capital asset. One would expect it to be treated also as a capital asset. Can you really say that you acquired the overage with a view to trading? In which case, it would be income treatment.
Claim the balance as part of CGT base cost of lease
This is my view - assuming that this is a full 15 year lease. I am looking at the corporation tax legislation at CTA 2009 for a trader. The income tax rules are similar but I haven't got them to hand.
1. The key section permitting the tenant to deduct is in CTA 2009 s 63. The tenant is allowed to deduct a certain amount "for each qualifying day" - s 63(1). This amount is treated as a revenue expense.
2. The daily amount he is allowed to deduct is fixed at the outset by the formula in s 63(4). Which says take the revenue amount of the premium and divide by the effective duration of the lease.
3. But the deduction lasts only "for each qualifying day" - this is any day of the term of the lease on which the tenant actually occupies the property (wholly or partly) for the purpose of carrying out the trade. - s 63(3).
4. So if the tenant moves out at year 3, well he can't claim a revenue expense any longer - see point 2 above. There is a balance remaining and this balance is NOT treated as a revenue expense.
Does this mean the balance can't be deducted? Not necessarily. Look at the CGT treatment.
1. By exercising the break clause, the tenant has disposed of the lease.
2. He is allowed to deduct his CGT base cost - TCGA 1992 s 38.
3. The base cost is the premium paid - but he has to exclude any part of the premium for which he has already received income tax relief - TCGA 1992 s 39.
4. So you don't include the £1440 you already claimed for. But you do include the £9,360 balance.
5. This is subject to the rules on wasting assets where you have to write down the base cost.
There may be two possible answers depending on the answer to this question.
1. If it is a 15 year lease - then you've already claimed 2/15 (or should it be 3/15) of that part treated as a revenue expense. This is the harder question.
2. But the fact that there is a break clause could point to the fact the term of the lease is treated as 3 years. In which you've claimed too little - you'd have been able to deduct the whole lot.
But it depends on what the break clause says and how likely it was to be exercised at the time the lease was entered into. Does it say "exercisable at year 3" or "exercisable if ceases to trade?"
I'm assuming this is for an individual investor putting his money into an ETN on the basis of a prospectus. I'm also assuming that in legal terms, an ETN is a form of debt security, so one would need to look at the rules on interest and also how a security is taxed on disposal.
and I think I saw a bit about how a foreign denominated security is taxed, but can't quite remember the link.
Of course, it will probably depend on the way the note is structured - and that's probably why the prospectus says it's unclear. But they should at least give some guidance for prospective investors.
I hope the links at least point you in the right direction!
Unfortunately you are right. The relief is geared towards disposals of assets that can be identifiable as "trading operations" in their own right. The only way in which an asset can otherwise qualify is when it's being sold off after the business has terminated.
My answers
Which statute?
Just ask him which statute he is relying on and get him to put it in writing.
He may well be right. But there's no harm in his having to look up the relevant legislation.
How will you achieve CGT treatment on a share buyback?
Normally, on a company purchase of own shares, the purchase price is split between an income element and a capital element. The capital element is just the amount paid when the shares were first subsribed - the remainder is all treated as a distribution.
You can get CGT treatment for the entire sum: see this article:
https://www.accountingweb.co.uk/topic/tax/share-buy-backs-get-details-ri...
but note one of the conditions is that
"The purchase must :
- be made wholly or mainly for the purpose of ‘benefiting a trade’ carried on by the company."
But the company doesn;t have a trade anymore. All it has is cash.
The alternative would be to liquidate and all the proceeds would be capital, but as you've pointed out, this may be expensive.
BDK
Thank you. Yes of course, there are anti-avoidance provisions re transactions in land.
Marrren v Ingles is about CGT
You have an asset - land. It is sold for:
1. Cash plus
2. The right to further consideration - an overage (if it were shares it would be an earn-out right).
Both 1 and 2 are the "sale proceeds in the CGT computation. You need to value the overage right in 1.
The right in 2 is another asset. When you receive payments for this, you are treated as having made a part disposal for CGT purposes.
This is a pure CGT treatment and this is what I understand is normally the case when someone sells land and receives part of the payment as "slice of the action."
Now the developer - he usually buys land with a view to selling on - a "quick profit" - and he is treated as trading for tax purposes. His profits/gains are all treated on income account.
BUT that doesn't mean that the person who sold the land is treated as trading. Just think - a person holding the land for investment purposes sells it to a developer. Why should his tax treatment be affected by what the buyer is going to do with the land?
The overage is part consideration for the sale of a capital asset. One would expect it to be treated also as a capital asset. Can you really say that you acquired the overage with a view to trading? In which case, it would be income treatment.
Claim the balance as part of CGT base cost of lease
This is my view - assuming that this is a full 15 year lease. I am looking at the corporation tax legislation at CTA 2009 for a trader. The income tax rules are similar but I haven't got them to hand.
1. The key section permitting the tenant to deduct is in CTA 2009 s 63. The tenant is allowed to deduct a certain amount "for each qualifying day" - s 63(1). This amount is treated as a revenue expense.
2. The daily amount he is allowed to deduct is fixed at the outset by the formula in s 63(4). Which says take the revenue amount of the premium and divide by the effective duration of the lease.
3. But the deduction lasts only "for each qualifying day" - this is any day of the term of the lease on which the tenant actually occupies the property (wholly or partly) for the purpose of carrying out the trade. - s 63(3).
4. So if the tenant moves out at year 3, well he can't claim a revenue expense any longer - see point 2 above. There is a balance remaining and this balance is NOT treated as a revenue expense.
Does this mean the balance can't be deducted? Not necessarily. Look at the CGT treatment.
1. By exercising the break clause, the tenant has disposed of the lease.
2. He is allowed to deduct his CGT base cost - TCGA 1992 s 38.
3. The base cost is the premium paid - but he has to exclude any part of the premium for which he has already received income tax relief - TCGA 1992 s 39.
4. So you don't include the £1440 you already claimed for. But you do include the £9,360 balance.
5. This is subject to the rules on wasting assets where you have to write down the base cost.
What's the effective duration of the lease?
There may be two possible answers depending on the answer to this question.
1. If it is a 15 year lease - then you've already claimed 2/15 (or should it be 3/15) of that part treated as a revenue expense. This is the harder question.
2. But the fact that there is a break clause could point to the fact the term of the lease is treated as 3 years. In which you've claimed too little - you'd have been able to deduct the whole lot.
But it depends on what the break clause says and how likely it was to be exercised at the time the lease was entered into. Does it say "exercisable at year 3" or "exercisable if ceases to trade?"
Try the Savings and Investment Manual
http://www.hmrc.gov.uk/manuals/saimmanual/saim1000.htm
I'm assuming this is for an individual investor putting his money into an ETN on the basis of a prospectus. I'm also assuming that in legal terms, an ETN is a form of debt security, so one would need to look at the rules on interest and also how a security is taxed on disposal.
There is an overview of the Manual here:
http://www.hmrc.gov.uk/manuals/saimmanual/SAIM1010.htm
which tells you that corporate bonds are discussed - so that's a good sign.
This link might also be helpful:
http://www.hmrc.gov.uk/manuals/saimmanual/SAIM1060.htm
and I think I saw a bit about how a foreign denominated security is taxed, but can't quite remember the link.
Of course, it will probably depend on the way the note is structured - and that's probably why the prospectus says it's unclear. But they should at least give some guidance for prospective investors.
I hope the links at least point you in the right direction!
You are right - TCGA 1992 s 169I(2)
Unfortunately you are right. The relief is geared towards disposals of assets that can be identifiable as "trading operations" in their own right. The only way in which an asset can otherwise qualify is when it's being sold off after the business has terminated.
Stark contrast with the old taper relief rules.