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Would transaction be taxed as income?
Our client has the following structure in place. The trading subsidiary (Tradeco) is owned 100% by a holding company (Holdco) which, in turn, is owned by 11 shareholders. These are four individuals and seven companies as follows – A, B, C, D, A Ltd (owned 100% by A), B Ltd (owned 100% by B), C Ltd (owned 100% by C), D Ltd (owned 100% by D), E Ltd, F Ltd and G Ltd. These are all close companies and no single shareholder (or combined with their companies) owns more than 25% of Holdco.
There is a shareholders’ agreement (SA) in place which values the company at £5m (regardless of reserves in either Tradeco or Holdco). The reserves currently in the company (Holdco + Tradeco) are c£2m.
Person A (PA) is looking to retire immediately and wants to sell his shares (those held personally and also the ones held by A Ltd). Person B (PB) is looking to retire in two to three years but worries that CGT rates could increase after the general election, and would prefer to bank his BADR/CGT now by crystallising a gain.
For ease, let’s say that A + A Ltd shares are worth £1m, and B’s are £1m, based on the shareholders’ agreement.
C Ltd, D Ltd, E Ltd, F Ltd and G Ltd have, between them, sufficient cash available to purchase A’s combined shares. B Ltd also has £1m in cash.
They have considered the following (which could be done either way round): Step 1 – B Ltd buys the shares from A and A Ltd. A retires and pays his CGT claiming BADR for the shares owned personally and any relevant gain in the company. Step 2 – C Ltd, D Ltd, E Ltd, F Ltd and G Ltd buy B’s individually owned shares. B crystallises a gain claiming BADR.
Following both steps, no shareholder (or combined with their companies) would own more than 25% of Holdco, although B’s shareholding would now be entirely in B Ltd. They do not, at this point, want to do a share buyback.
This screams transactions in securities, but does the presence of the shareholders’ agreement which places a valuation on the business assist in ‘bypassing’ the TiS legislation?
Presumably if A sold his shares for £1m plus his percentage of the £2m reserves, the excess (ie the % of £2m) would be caught under TiS and taxed as income.
Query 20,299 – TiSsues?
Correct tax treatment of gift to charities.
I am trustee of an employee benefit trust (EBT) that has capital funds arising from the sale of shares that were settled when the EBT was established.
As permitted by the trust deed some discretionary payments have been made from these capital funds to UK registered charities. The total amount was entered in box 11.3 of the 5 April 2023 trust return as this seemed appropriate and my software gave rise to nil tax. However, HMRC is showing tax due which reconciles as 20% of the payments.
What should the correct tax treatment be? And is box 11.3 correct? Also if 20% tax is correct should this feature in the tax pool calculation?
Query 20,300 – Trustee.
Has HMRC forgotten about my client?
I have an elderly client who receives a very good state pension and minimal untaxed interest. Historically, this lady was under self assessment (SA) because even then her pension exceeded the personal allowance. Then HMRC wrote and said that after 2017-18 a SA tax return would not be required. I replied and explained that there would be a tax liability in subsequent years because of the level of state pension.
HMRC replied: ‘Any outstanding tax due on her state pension will be collected through simple assessment which will automatically be sent to (my client) at the end of each tax year.’ Neither my client nor I have heard anything from HMRC since. I calculate her tax due in recent years to be:
- 2018-19: £230.20
- 2019-20: £165.00
- 2020-21: £289.80
- 2021-22: £267.40
- 2022-23: £353.40
- 2023-24: £643.00
It would not surprise me if HMRC has completely lost track of my client. My guess is that there is a growing number of elderly people in the same situation.
My questions are: a) what are my responsibilities towards HMRC and towards my client?; and b) where do I locate specific guidance on what to do in such circumstances?
Query 20,301 – Noble.
Has input tax been overclaimed on costs linked to sale?
One of my clients trades as an estate agent and is partially exempt because they also arrange mortgages and earn a commission. The client recently sold part of the mortgage activity to another agent and it met the TOGC conditions as a ‘part business’ sale, ie no VAT was charged.
The problem relates to input tax on the professional fees linked to the sale – my client treated them as an overhead cost and therefore partly claimed the VAT as residual input tax.
However, is this correct in view of the fact that the fee income was wholly exempt? As a twist to the tale, a colleague has suggested that we should have claimed all of the input tax because the proceeds were used to open a new branch of the business which will only generate VATable income ie, no exempt sales. My colleague mentioned the recent case of Hotel la Tour Ltd. What do readers think?
Query 20,302 – Dilemma Dave.
Queries and replies
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