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bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4799
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we have found an investor for our company who is willing to

Customer Question

we have found an investor for our company who is willing to invest and take over the ongoing liabilities and running costs. if i receive payment for my shares in a company and then have to reinvest/loan the money back to the company am i correct in thinking that there is no capital gains tax as i have not made an actual "capital gain" and have reinvested the money immediately ?
Submitted: 4 years ago.
Category: Tax
Expert:  bigduckontax replied 4 years ago.
Hello, I'm Keith and happy to help you with your question.

If you sell your shares then the proceeds may be liable to Capital Gains Tax on any gain you have made. You say that you have to reinvest in the company by means of a loan.

Unfortunately selling shares and re-investing does not entitle you to Business Asset Roll Over Relief. Such relief is confined to the disposal of assets like property, plant and machinery etc.

From the capital gain you have made you have an annual allowance of 11.9K. Also, if you have been a member of the company since its inception you may be entitled to Entrepreneurs' Allowance which would limit the taxation on the gain to 10%. The gain can be offset by any other capital losses made in the tax year and also brought forward losses.

I am sorry to have to bring such gloomy news.
Customer: replied 4 years ago.

hi keith

so if i am paid £100k for my shares and reinvest £100k as working capital to the business i am still liable to pay £8810 in CGT?

does the fact i have invested £100k and will ultimately receive a lesser shareholding and not repayment of loan not count as a loss?

eg. i sell 50% of company for £100k. reinvest £100k but only receive 25% back in shares and no loan repayment. would that class as a loss? or would i still have CGT liability of £8810?

Expert:  bigduckontax replied 4 years ago.
Not exactly, the original cost of the shares and any selling costs reduce the amount of the capital gain, but essentially that is the case assuming that you are entitled to Entrepreneur's Allowance. It is the sale of the shares which triggers CGT and as I have told you there is no entitlement to Roll Over Relief. The reinvestment position is an irrelevance for CGT purposes. You are buying new shares and effectively starting the whole cycle again for when you sell at some indeterminate future date.

There is a way of reducing your liability by selling over two tax years. You would then have two blocks of allowance and effectively, using your figures and assuming an entitlement to Entrepreneurs' Allowance, then the overall bill would be GBP 3810 x 2 = 7620. Not a lot I agree, but something to consider if the buyers would agree to this method and we are but a month and a half away from the tax year end.
Customer: replied 4 years ago.

thanks Keith

I had thought that i would get relief or deferral based on EIS reinvestment in the same company? would i not qualify for that?

it just does not seem practical or fair that i would be liable for tax on something that i have not gained .i.e. £100k in and 100k straight out that could well be never repaid and never recovered via the shares purchased

Expert:  bigduckontax replied 4 years ago.
Now the EIS scheme does change the whole ball game. A disposal of shares acquired under such a scheme would escape CGT on sale providing that you have owned the shares for 3 years (5 if you bought prior to 6 April 2000) provided the initial income tax relief was given and not withdrawn on those shares. However this relief is not available if you own over 30% of the equity in the company.

CGT is a tax which has the habit of creeping up on one with a sock full of wet sand in quite unexpected ways as you are finding. What seems perfectly simple reinvestment suddenly triggers CGT. It might also be an idea to write a letter to your tax office asking for guidance.

There is often little fairness in taxes. Remember Benjamin Franklin's dictum that in life there are but two certainties, death and taxes.
Customer: replied 4 years ago.

how very true

so( finally), if i were to reinvest the 100k as a loan but it is not repaid, or is defaulted on or i only get `£50k of shares in return for the investment would this then class as a capital loss the next year? so i would ultimately be able to get to a balanced position in that case?

Expert:  bigduckontax replied 4 years ago.
We all know how dodgy some of these investments in private companies can turn out. If the new shares became worthless as you envisage might happen then you would indeed have a capital loss to offset gains in the collapse year or to carry forward. Just a hint, might not it be a good idea to do the change after 6 April. Then if the company went to the wall in 14/15 tax year then that would be the year the capital gain crystalised and the loss would offset same. You still wouldn't have got your 100K out though, but you would have avoided nearly 9K of CGT!