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bigduckontax, Accountant
Category: Tax
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My client is about to acquire 50% shares of a company with

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My client is about to acquire 50% shares of a company with a partner getting the other 50%. The lawyers are drawing up the agreement. Presently the company has a value of £0 as it has no assets and no orders. However the hope is it will grow to be about a £10million company in 5 years. The lawyers are trying to make the agreement so that a sale is based on Enterprise Value as they say it has tax advantages. However with all the discounts they put in this will give a very low valuation. My client believes Net Book Value and Enterprise Value would both be subject to Capital Gains Tax - is this correct? Or are there more advantages with Enterprise Value even though the valuation will come out lower?
Hello, I'm Keith and happy to help you with your question.
My immediate reaction would be to ask the lawyers what the tax advantages actually are? I could tell you that the moon is made of green cheese, but that does not get us vary far forward in interplanetary knowledge!
This is a private company, its value in basic terms is what a customer is prepared to pay for it which may differ substantially from its book value.
Capital Gains Tax (CGT) does not affect the buyer, it is the vendor who might be liable to the tax on any gain that might be made. The higher the value placed on the company at purchase, ie the consideration paid, will, in the very long term, reduce the CGT on your client when ho comes to sell at some indeterminate future date. Your client will, of course, have the benefit of Annual Exempt Amount, currently 11K, to offset any gain on sale.
I do hope I have been able to shed some light on your conundrum.
bigduckontax and 2 other Tax Specialists are ready to help you
Customer: replied 3 years ago.

My client is thinking about when he comes to sell - so you are saying that CGT will be charged on the sale whether it is assessed by Enterprise Value or Net Book Value. Also I think if Entrepreneurs relief is still around, it will also apply to both types of sale?

Yes, at some future indeterminate date CGT will apply on the gain. This will be levied at 18% or 28% or a combination of the two rates depending on his income including the gain in the year of sale. The gain would be net of his Annual Exempt Amount (AEA) of 11K [14/15 rates].
However, as you surmise, Entrepreneurs' Relief will reduce this to a flat rate of 10% on the gain, again after AEA. That's assuming that some enterprising Chancellor hasn't removed this relief in between!
Thank you for your support.
Sorry for the long delay in answering your follow up question. I was doing some gardening; I hate gardening.