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We have recently commenced to act for a trading company together with the personal affairs of its two directors/shareholders. Prior to our engagement, and on advice given by their former agent, one of the individuals sold the property from which the company traded, to the company itself. The sale proceeds were approximately £250,000 (and reflected full market value) but these were satisfied by the issue of 250,000 £1 ordinary shares in the company.
We have recently commenced to act for a trading company together with the personal affairs of its two directors/shareholders. Prior to our engagement, and on advice given by their former agent, one of the individuals sold the property from which the company traded, to the company itself. The sale proceeds were approximately £250,000 (and reflected full market value) but these were satisfied by the issue of 250,000 £1 ordinary shares in the company. (It should be noted that the other shareholder was not given an opportunity to increase his shareholding - although this is not the particular problem on which we are seeking advice.)
Our client was told that the issue of shares in the company, which is unquoted, would enable him to claim rollover relief following the sale of the property. Our own opinion is that ordinary shares are not a class which qualifies for rollover relief. The company has since sold on the property it acquired. While it made no gain, it has reinvested the proceeds it received into a new property purchased, with the help of a mortgage, for £500,000.
As it stands, the individual now has a substantial tax liability as well as having given away his main income-bearing asset. The use of dividends to supplement his income may be difficult.
We would be interested to hear if readers can offer any suggestions as to how the individual may extricate himself from the position he finds himself in. Unfortunately a negligence claim against the former agent, if appropriate, is unlikely to succeed.
(Query T16,003) - DWD.
The client needs to get back as far as possible to the original position. It will not be possible to unwind the original transactions as the property in question has been sold on, so the most effective mechanism is to effect a purchase of own shares. The Inland Revenue does not accept that purchases of own shares can be effected in specie (see the Revenue's Company Taxation Manual at paragraph CT1750) although the company law position in respect of this is not entirely clear. Hence the company will need to buy back the £250,000 ordinary shares for cash. It is assumed that the company does not have surplus cash of £250,000 which can be returned permanently to the client, so it will need to borrow this sum on a short term basis.
It will be necessary to examine the terms of the mortgage over the property in some detail to check any restrictions on selling the property. The client may be able to buy the property net of the mortgage for £250,000 (which would repay the short term loan above), or more likely he can buy it outright for £500,000 which can then be used to repay the original mortgage and the short term loan.
The purchase of own shares will not fall within the capital gains tax régime in sections 219 to 229, Taxes Act 1988, as the shares have not been owned for five years (section 220(5)), nor is the vendor's shareholding substantially reduced (section 221). The repayment will prima facie constitute a distribution under section 209, Taxes Act 1988 but, provided that it takes place at par, the distribution will be equal to nil. Stamp duty will be payable at 0.5 per cent of the consideration for the shares and 4 per cent for the property. - A.N.A.
I think that the old accountants were not going for 'rollover relief' but trying some form of reinvestment relief, now replaced by the enterprise investment scheme. Sadly, this fails by the fact that the director did not subscribe for shares in cash.
It is always unwise to try and undo historic transactions, and so I suspect that there is little hope of deeming the sale to the company of the property 'null and void'. It may be worth looking through the company's Memorandum and Articles to find the whole transaction ultra vires, but this is clutching at straws.
The best option open is to go for retirement relief (if this is claimable for the client, and the normal conditions apply), and wind up the company so that the shareholders get a return on their capital. If this is done by evoking Extra-statutory Concession C16, then the resultant gain, after reliefs applicable, is taxed on the shareholders.
The directors will then be free to start again with a clean sheet. This is dependent upon the full agreement of the other shareholders, plus one will need to be extremely careful about setting up a replacement company to avoid attack under the Ramsay principle. The alternative is as already suggested: dividends. - Albertine.
Editorial note. There does not seem to be much hope to be offered here, but it seems possible that the property was sold for £250,000 and the shares were issued for £250,000 but no cheques actually passed. If so, it will be worth asking the Revenue's Small Company Enterprise Centre at Cardiff if it will accept that in these circumstances the shares were issued in cash so that rollover relief under the enterprise investment scheme can be claimed. Given the Revenue's dislike for the enterprise investment scheme, however, I do not think the chances of a favourable response are all that high.
