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Would sale of shares attract relief?
Until February 2021 K Ltd, a trading company, was owned by four unconnected individuals A, B, C and D. C and D wanted to exit and so a holding company was set up, owned by A and B. This acquired the shares in K Ltd held by C and D (amounting to 49% in total). The other 51% of the shares in K Ltd continued to be held by A and B. There were also a small number of non-voting shares in K held by the spouses of A and B.
To simplify the structure before a potential sale in 3-4 years, the non-voting shares were bought back by the company at par and a share-for-share exchange was carried out in June 2022 under which A and B exchanged their shares in K Ltd for new shares in H Ltd. Clearance was obtained. H is thus owned 100% by A and B and K Ltd is owned 100% by H Ltd. K continues to trade: H’s only income is dividends from K Ltd.
A quoted company has now offered to purchase H Ltd. The transaction is likely to go through in March 2023 and I am concerned about the BADR position. On formation in 2021, H Ltd only held 49% of the shares of K Ltd and did not qualify as the holding company of a trading group. It became a qualifying holding company in June 2022, when it acquired the other 51% of K Ltd. This would mean that a sale of H Ltd in March 2023 would not attract BADR as the shares would have been held for less than two years. Do readers agree that BADR would not be available on a disposal in March 2023?
It would be possible to elect to disapply the normal rules on the 2022 share exchange (HMRC manual GG64155). BADR would apply to that disposal. The downside would be that the CGT would still be payable even if the sale of H Ltd fell through. Could we wait until the sale of H to make the election?
It has been suggested that A and B could gift some shares to their spouses, who are employees of K Ltd, in order for them to be able to claim BADR. Would this work, or would their qualifying period only start from the date of the gift? Could we take account of the period when they held non-voting shares?
Query 20,067 – Worried.
Can I act for warring parties?
I act for a UK manufacturing company with three (unconnected) directors: A, B, and C each of whom owns one-third of the shares. Director A is a personal tax client of mine. Most of my interactions are with Director B, the finance director.
Up to now the three directors got on well but there has been a major disagreement, with A wanting to take the company in one direction and B and C in another. A has asked me to advise him on the tax implications of buying out B and C but doesn’t yet want to put a proposal to B and C until he has sufficient financial information to value the company. He has asked me to obtain that information from B, the finance director, as requests coming from me are less likely to arouse suspicion. I am stuck in the middle.
Clearly I can’t act for B and C (as I don’t act for them at the moment) but can I still act for the company as well as A, or, as I fear, will I have to choose between acting for A or for the company?
Query 20,068 – Split down the middle.
Granny flat conversion costs.
My client has owned his large family home for many years and still lives there. Some time ago a substantial amount of work was undertaken to convert part of the property into a self-contained ‘granny flat’ for his mother to move into. This included installing a new bathroom and kitchen and creating a separate entrance from outside. After his mother died, by which time his children had left home, the granny flat was rented out to a tenant on commercial terms. My client is now selling the entire property and the tenant will be moving out before the sale.
I appreciate that because part of the property had been let out, full PPR will not be available and a CGT computation will be needed. My question concerns the costs of the granny flat conversion. Do the costs of that have to be set only against the proportion of the gain which relates to the rental income or should I include them in the computation of the entire gain and then apportion that gain to calculate the amount which is not covered by PPR? There is a material difference in the amount of tax payable depending on which method is chosen. Query 20,069 – Homestead.
Will property and florist sale qualify as a TOGC?
One of my clients rents his commercial property to a florist business. My client wants to sell the property and the tenant is also keen to retire from trading. However, a potential buyer will only do a deal with my client and the florist if he can buy both the property and the business at the same time.
The advisers for the buyer said that VAT will not be chargeable on the property sale – although my client has opted to tax the building and always charged VAT on the rent – because the whole deal will qualify as a TOGC. Is this correct? Or should the buyer have the property and trading assets in separate legal entities to achieve a TOGC outcome (ie, rent is charged from a landlord to a tenant)?
Query 20,070 – Flower power.
Queries and replies
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