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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15946
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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GA-ja Solicitors advise that SALE OF SHARES option would prove more

Customer Question

Solicitors advise that SALE OF SHARES option would prove more costly, because of warranty requirements, due diligence fees, more detailed contract of sale, stamp duty, etc.
Seems to me that tax implications (and possible liquidation costs) relating to a SALE OF ASSETS would outweigh the above.
If I provide you with the following details could you assess the resulting tax liabilities for each option (including informal/informal liquidations).
I have done some rough calculations but need to be sure.
Would you believe, 30years in practice and this is my first business sale case, indicates that clients (and myself) are getting older and looking towards retirement !
SALE OF SHARES :
1 shareholder only (Higher rate taxpayer)
Sale value......£80,000
Entrepreneurs relief applicable
SALE OF ASSETS :
Goodwill value............£85,000 (Original cost on incorporation £60,000)
F&F...........................£7,000 (NBV is Nil)
Stocks.......................£1,400 (Cost £1,400)
Distribution to shareholder after settlement of liabilities (including withdrawal of liquid funds to cover directors loan account)....£78,000.
Note that copy tax return 2008/2009 provided by HMRC indicates that Entrepreneurs Relief claimed £60,000 on transfer of sole tradership to limited company.....no CGT.
The T.B. provided by previous accountants shows :
Dr. Goodwill £60,000
Cr. Share Capital £1.00
Cr. Directors Loan £59,999
Best Regards
Alan
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

You'll have to leave this with me for a while.
Customer: replied 2 years ago.

No problem.

Incidentally re F& F......NBV should read WDV

Expert:  TonyTax replied 2 years ago.

Would it be fair to say that the owner operated as a sole trader and incorporated, effectively selling the business to his limited company for £60,000. Therefore, his shares cost £60,000 and the gain from selling the business to the company was not rolled over as that would have prevented a claim for entrepreneurs relief.

Customer: replied 2 years ago.

That is how it appears to me but the share issue was only £1.00, the balance going to directors loan, at least 50% of which has since been withdrawn. No roll over because entrepreneur relief claimed.

During the year of incorporation 2008/2009 there were total gains before annual exemption, amounting to £33333

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave this with me while I do some calculations.
Expert:  TonyTax replied 2 years ago.

You said that entrepreneurs' relief was claimed on £60,000 (gain?) on the transfer of the business to the company. Do you not mean incorporation relief as you said there was no CGT? Claiming ER would not necessarily wipe out a CGT liability whereas incorporation relief would defer a gain. How many shares were issued?

Customer: replied 2 years ago.

No,. box 15 on the Capital Gains supplementary page shows £60,000

Entrepreneurs Relief. I took it to mean that of this amount only £23,733 (being gains less annual exemption £9600) was utilised.

Only one £1.00 share was issued.

Apologies for delay have been offline for a few hours.

Expert:  TonyTax replied 2 years ago.
Thanks.
Customer: replied 2 years ago.

Just curious, why are your answers, and my replies, clocking at 5 hours earlier than the time here ?

Expert:  TonyTax replied 2 years ago.
The site is US based. However, I'm in the UK.
Customer: replied 2 years ago.

Of course should have realised.

Just to clarify regarding the case , only Income Tax and Class 4 NIC assessed and paid for 2008/2009.

As you suggest could be that the entry for Entrepreneurs Relief should in fact be Incorporation relief.

Expert:  TonyTax replied 2 years ago.
Which box of the 2008/09 tax return was £60,000 put in such the taxable gain ended up being £0. Was any note put in the white space?
Customer: replied 2 years ago.

PAGE CG 1 :

Box 1 Total gains 33333.00

Box 6 Total gains after losses 33333.00

Box 7 Annual exemption 9600.00

Box 8 Net chargeable gains 23733.00

Box 15 Entrepreneurs relief 60000.00

All other boxes and white space left blank.

In reviewing clients gross income for 2008/2009 she received :

Self employment (1 month only)

Rental income

Dividends

Salary (11 months)

All equating to an income tax liability of circa £7600.00, but no

CGT assessed

Expert:  TonyTax replied 2 years ago.
Thanks.

ER worked differently in 2008/09 to how it works now. In that year, a deduction of 4/9th was given so that a gain of £60,000 would be reduced by £26,667 to £33,333. After deduction of the annual CGT exemption, the net taxable gain would be liable to CGT at the taxpayer's top rate of tax. If that was 40%, the effective rate of CGT would be under 10%. Now, gains qualifying for ER are taxed at 10%.

The gain appears not have to been deferred but I don't understand why no CGT appears to have been assessed, though it would be part of the overall tax liability figure so may not be obvious to you.

I'm finalising my answer right now.
Customer: replied 2 years ago.

Many thanks.

Think I have missed a point, when taking on this client I noted that property rentals were being assessed solely on her , whereas properties were jointly owned with her husband (basic rate taxpayer).

The consequent amendment to the assessments would have affected the tax due for 2008/2009, Will look into that.

Expert:  TonyTax replied 2 years ago.
OK.
Expert:  TonyTax replied 2 years ago.

Hi again.

Selling the shares will probably be less costly tax wise than the company selling the assets will be as the second option means that there is are extra layers of tax to get through before the cash reaches the shareholder. With the first option, there is only CGT to pay. With the second option, there will be CT and either income tax or CGT to pay.

COMPANY SELLS ASSETS


Unless the company sells the fixtures and fittings for more than it cost, there will be no capital gain but there may be a balancing charge if capital allowances were claimed. Of course, the balancing charges would increase the profit chargeable to corporation tax. Stock is normally accounted for at book value.

The company paid £60,000 for the business and will receive £85,000 by selling the goodwill so it will make a profit or gain of £25,000. Corporation Tax on that at 20% will be £5,000. Indexation relief to counter inflation would only be available to increase the £60,000 cost of the goodwill and thereby to reduce the corporation tax charge mentioned above if it (the goodwill) was bought or created before 6 April 2002. If indexation relief isn't available, then the gain will be treated as trading income as opposed to a capital gain and the CT liability will be £5,000.

If the post corporation tax profit is distributed as a dividend, it will need to be grossed up at 10% so, for example, a £900 cash dividend equates to £1,000 gross. Higher rate tax for a 40% taxpayer on £1,000 would be £225 (£1,000 x 32.5% dividend rate - 10% tax credit). I would need to know what the actual post CT distributable profit would be in order to calculate the higher rate income tax liability or the CGT liability.

As there is likely be more than £25,000 to distribute, a formal liquidation will need to take place to faciliate a claim for entrepreneurs' relief and a CGT rate of 10% on the deemed gain.

SHAREHOLDER SELLS SHARES

The business was sold to the company for £60,000 and in exchange 1 share worth £1 was issued and a cash payment of £59,999 was made, albeit that cash was effectively loaned to the company by the shareholder as the company had no cash. To the extent that the sale price was settled in shares, that part of the gain applicable to the share would have been deferred automatically under the incorporation relief rules. Where cash is involved, there is always a Capital Gains Tax issue. The deferred gain was £1.

If the shares are sold for £80,000, the shareholder will make a gain of £79,999 (£80,000 - £1) The first £11,100 of the gain will be exempt and the balance of £68,899 will be charged to CGT at 10% assuming the criteria for entrepreneurs' relief are met, giving rise to a CGT liability of £6,889.90.

I hope this helps but let me know if you have any further questions.

TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15946
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
TonyTax and other Tax Specialists are ready to help you
Customer: replied 2 years ago.

Many thanks for your advice much appreciated but surely worth more than £36.00.

Just to confirm I had been "blinded" by the fact that the CGT in 2008/2009 was virtually wiped out by the later overpayment claim on property income,. CGT paid was £4272.

Best Regards

Alan

Expert:  TonyTax replied 2 years ago.
Thanks for accepting my answer and for the generous bonus which is much appreciated.
Expert:  dianne-cssm replied 2 years ago.

We received your customer service inquiry, however, we are unable to respond to you because we do not have your email address. Please contact customer support at [email protected] co.uk and provide us with your email address and a link to this question page so that we can help you. (http://www.justanswer.co.uk/tax/91b5p-solicitors-advise-sale-shares-option-prove.html). Thank you, ***** ***** Customer Support Team.

Customer: replied 2 years ago.

Partnership business (VAT Registered) propose purchase of a commercial property to be used for office/storage, with ground floor rented out as a retail shop.

The seller has opted to tax, so VAT payable on the purchase.

Amount of VAT is quite considerable ...£50,000.

Partnership rents out another commercial property (VAT not charged).

Main business activity does not consist of property rentals.

Questions

1) Could there be any restriction on input tax reclaim relating to the property purchase (VAT to be charged on rentals).

2) Does option to tax on this new property affect the position regarding the property already held.

Thanking you

Expert:  TonyTax replied 2 years ago.
Hi.

You will need to ask this as a new question I'm afraid as it is on a different topic.