Company Sale

Directors and Associates Loan Account in M&A transactions

Company Sale

“So you want to pay more tax than you ought when you sell shares in a company?” If the answer to this question is "NO!" then this article is essential reading.

Problems can arise in one of two situations:

If you have a group company or a number of companies in common ownership it is possible that you have inter group loan accounts on the balance sheets of some or all of these companies. It is essential in those circumstances that you have deal with them prior to sale.

You may have purchased the shares in the company with a completion payment that is split into two parts, part purchase price and part introduction of a loan amount. This often occurs where the original seller had introduced loan capital into the company to develop the business or to expand it but did not do so by the creation and acquisition of additional shares. This would mean that the purchase price element would be the starting point for the calculation of Capital Gains Tax on sale.

Why is there a problem?

Section 455 of the Corporation Tax Act 2010 https://www.legislation.gov.uk/ukpga/2010/4/section/455 provides for a 25% tax charge where a loan is created in favour of a participator or an associate of a participator that is not at arms-length. In a sale if the loan is not dealt with appropriately it is likely that the loan itself will be a breach of warranty if not fully and fairly disclosed. Furthermore, the writing down of the loan at completion would create the 25% tax charge on the company and have to be borne by the buyer. In addition, the structure of the purchase price as the full completion payment might not be tax efficient. For instance if you don’t consider the loans at sale having done so at purchase the full amount of the loan capital that you introduced would be subject to Capital Gains Tax as it would not have formed part of the original purchase price meaning that the starting point from which CGT liability will be calculated will be lower. It is essential that careful consideration is given in these circumstances to how to deal with the inter group loans as part of the completion process.

So what should you do now?

If you are thinking of selling a business and you think this is relevant we recommend that you contact our Brendan O’Brien to discuss your options. We work with a number of accountants who will be able to assist you in determining the appropriate method to use to complete the transaction in a tax efficient manner. Contact us here: http://www.breezeandwyles.co.uk/index.php/form-for-business/


Landlords lose and whiplash gets cracked in Osborne’s autumn budget

Backtracking on the contentious cuts to Working Tax Credits caught the headlines when Chancellor George Osborne delivered his Autumn Budget statement, alongside a boost to building and good news for first time buyers.

The Chancellor announced the allocation of £4 trillion of public spending over the next four years, with an £8 billion reduction in borrowing now being forecast and a predicted surplus of £10 billion by 2019-20.

In a package of measures designed to help with housing, Mr Osborne announced a doubling of the housing budget to £2bn a year, to fund 400,000 new affordable homes by the end of the decade, to both buy and rent. Help to Buy has been extended with restrictions removed on shared ownership schemes, so more people can get on the housing ladder.  There’s also a new Help to Buy equity loan scheme that will give London buyers 40% of the home value from early 2016, doubling the 20% offered under the current scheme.

But for second home owners and landlords looking to add buy to let properties to their portfolio, the Chancellor dealt another blow by announcing a massive 3% extra levy in land tax stamp duty on such purchases with effect from April 2016. The money raised will be used to fund investment in local communities. This follows on the heels of his last Budget when he announced that there would be a cut in tax relief on mortgage interest for landlords.  Tax relief is set to be gradually restricted to the basic rate, currently 20%, where landlords had previously been able to offset mortgage interest against top rates of tax.  The shift was to tackle what the Chancellor called an “unfair advantage” for landlords over homeowners.

Said Brendan O’Brien Managing Director of Breeze & Wyles Solicitors Limited:  “Landlords have been in the Chancellor’s sights for some time, with high levels of buy to let pushing up house prices and reducing affordability for first time buyers.  Buyers of second homes will also be caught by this new rate of stamp duty on their future purchases.  With the policies he set out today, it’s likely to reduce some heat in the housing market, once the new stamp duty level kicks in.”

He added: “The other sting in the tail for landlords and others making capital gains is the shift towards faster digital taxation processes.  Mr Osborne has ambitions to build one of the most digitally advanced tax systems in the world and one result of this will be faster collection of capital gains tax, which is payable on any gain made by a landlord or second home owner on a property when they sell up.”

The Chancellor also announced that people will no longer be able to get cash compensation for minor whiplash claims, in a crackdown designed to cut the number of fraudulent claims and likely to lead to reduced motor insurance premiums.   Instead, such injuries are expected to go to the small claims court with the upper claims limit increased from £1,000 to £5,000.

Underused courts will also be closed, saving £700m which will be used towards the introduction of new technology into the court service.

ENDS

Web site content note: 

This is not legal advice; it is intended to provide information of general interest about current legal issues.