21 February 2001
Replies to Queries – 4
The costs of falling out
We act for Oldco Ltd which has two directors who wish to transfer the assets and business to a newly formed company, Newco Ltd. It is intended that Oldco be struck off at Companies House when convenient, and any tax problems in that company might not be important.
The costs of falling out
We act for Oldco Ltd which has two directors who wish to transfer the assets and business to a newly formed company, Newco Ltd. It is intended that Oldco be struck off at Companies House when convenient, and any tax problems in that company might not be important.
Replies to Queries – 4
The costs of falling out
We act for Oldco Ltd which has two directors who wish to transfer the assets and business to a newly formed company, Newco Ltd. It is intended that Oldco be struck off at Companies House when convenient, and any tax problems in that company might not be important.
The two directors of Oldco have 5,000 shares each of the issued share capital of 10,001 £1 shares. The third shareholder with 1 share will not co-operate so a name change for Oldco, or a share exchange for Newco shares, or trying to force a sale of her share are not considered acceptable options. Newco will have a nominal £100 share capital owned equally by the two directors.
Whilst this appears to be a common scenario, we cannot locate any advice on possible pitfalls and the Inland Revenue has written to say that it does not fall within its clearance procedure.
If goodwill is treated as nil and net assets of £300,000 are transferred to Newco Ltd, then an inter-company debt due to Oldco for the assets will arise. We have been advised that the write-off of the debt of £300,000 within Newco will not be taxable and there should be no other problems, in particular capital gains for the shareholders.
Have any readers been able to resolve a similar problem?
(Query T15,759) – Concerned.
The third shareholder may have a nuisance value in the context of Part XVII of the Companies Act 1985. Appropriate legal advice should be sought.
The striking off of Oldco might not be permitted without the acquiescence of the third shareholder. Liquidation would impose capital gains tax on the directors. Care should be taken that whatever procedure is adopted does not leave the Crown the owner of the £300,000 debt from Newco as might possibly happen under section 654, Companies Act 1985 (bona vacantia).
Perhaps it is intended that Newco will execute a deed of release to extinguish the debt. A scrutiny of the close company provisions of Part XI, Taxes Act 1988 does not suggest any adverse consequences.
However, Chapter I in Part XVII of that Act (transactions in securities) has been shown to have a wide impact. Will the directors have obtained a tax advantage? If Oldco were to pay out its profits as dividends and the value of its assets as capital in liquidation, to enable the directors to subscribe for shares in Newco, they would suffer much tax. Prior application for clearance under section 707, Taxes Act 1988 seems desirable.
It is implied that goodwill is the only chargeable asset but it is risky to assume a nil value. If the two companies trade in partnership for a short while, the old goodwill could be replaced by new values. – Elder.
As the directors control both companies, the latter are connected persons with each other and with each director. So inter-company transfers of assets are deemed to be at market value, whether or not the debt is later forgiven, and a capital gains tax gain or loss on sale would arise to Oldco. Correspondingly the capital gains tax base cost of the assets to Newco would be the said market value.
Even if the companies were unconnected and at arm's length, there would be no question of the debt being written off 'within Newco', as it can only be written off by the creditor – Oldco.
The logical solution is to get Inland Revenue clearance of what is seemingly a reconstruction without change of (at least 75 per cent of the) ownership, which would remove capital gains tax from the picture. As the stumblingblock to this, the dissenting member, has a minority holding, and can be outvoted, the root of the clients' problem is clearly an unstated personal consideration, and there is no tax efficient alternative to resolving this.
When personal influences start costing tax, or other expense, it is time to liquidate and restart in a format that does not include the disruptive influence. – Barham.
Editorial note. What is proposed in the query is a sale of the business to a new company for which there is no particular tax relief.
'Concerned' has, it is assumed, already pursued the possibility of a purchase of own shares in relation to the dissenting shareholder. One would have thought that, if the bargain is sufficiently generous, she would eventually accept.
To secure tax relief, a reconstruction within sections 136 and 139, Taxation of Chargeable Gains Act 1992 is required, but unless the dissenting shareholder can be eliminated first, the stamp duty relief in section 75, Finance Act 1986 will still not be available.
The costs of falling out
We act for Oldco Ltd which has two directors who wish to transfer the assets and business to a newly formed company, Newco Ltd. It is intended that Oldco be struck off at Companies House when convenient, and any tax problems in that company might not be important.
The two directors of Oldco have 5,000 shares each of the issued share capital of 10,001 £1 shares. The third shareholder with 1 share will not co-operate so a name change for Oldco, or a share exchange for Newco shares, or trying to force a sale of her share are not considered acceptable options. Newco will have a nominal £100 share capital owned equally by the two directors.
Whilst this appears to be a common scenario, we cannot locate any advice on possible pitfalls and the Inland Revenue has written to say that it does not fall within its clearance procedure.
If goodwill is treated as nil and net assets of £300,000 are transferred to Newco Ltd, then an inter-company debt due to Oldco for the assets will arise. We have been advised that the write-off of the debt of £300,000 within Newco will not be taxable and there should be no other problems, in particular capital gains for the shareholders.
Have any readers been able to resolve a similar problem?
(Query T15,759) – Concerned.
The third shareholder may have a nuisance value in the context of Part XVII of the Companies Act 1985. Appropriate legal advice should be sought.
The striking off of Oldco might not be permitted without the acquiescence of the third shareholder. Liquidation would impose capital gains tax on the directors. Care should be taken that whatever procedure is adopted does not leave the Crown the owner of the £300,000 debt from Newco as might possibly happen under section 654, Companies Act 1985 (bona vacantia).
Perhaps it is intended that Newco will execute a deed of release to extinguish the debt. A scrutiny of the close company provisions of Part XI, Taxes Act 1988 does not suggest any adverse consequences.
However, Chapter I in Part XVII of that Act (transactions in securities) has been shown to have a wide impact. Will the directors have obtained a tax advantage? If Oldco were to pay out its profits as dividends and the value of its assets as capital in liquidation, to enable the directors to subscribe for shares in Newco, they would suffer much tax. Prior application for clearance under section 707, Taxes Act 1988 seems desirable.
It is implied that goodwill is the only chargeable asset but it is risky to assume a nil value. If the two companies trade in partnership for a short while, the old goodwill could be replaced by new values. – Elder.
As the directors control both companies, the latter are connected persons with each other and with each director. So inter-company transfers of assets are deemed to be at market value, whether or not the debt is later forgiven, and a capital gains tax gain or loss on sale would arise to Oldco. Correspondingly the capital gains tax base cost of the assets to Newco would be the said market value.
Even if the companies were unconnected and at arm's length, there would be no question of the debt being written off 'within Newco', as it can only be written off by the creditor – Oldco.
The logical solution is to get Inland Revenue clearance of what is seemingly a reconstruction without change of (at least 75 per cent of the) ownership, which would remove capital gains tax from the picture. As the stumblingblock to this, the dissenting member, has a minority holding, and can be outvoted, the root of the clients' problem is clearly an unstated personal consideration, and there is no tax efficient alternative to resolving this.
When personal influences start costing tax, or other expense, it is time to liquidate and restart in a format that does not include the disruptive influence. – Barham.
Editorial note. What is proposed in the query is a sale of the business to a new company for which there is no particular tax relief.
'Concerned' has, it is assumed, already pursued the possibility of a purchase of own shares in relation to the dissenting shareholder. One would have thought that, if the bargain is sufficiently generous, she would eventually accept.
To secure tax relief, a reconstruction within sections 136 and 139, Taxation of Chargeable Gains Act 1992 is required, but unless the dissenting shareholder can be eliminated first, the stamp duty relief in section 75, Finance Act 1986 will still not be available.
