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Summary Tax Issues on a Share Sale
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4. SHARE SALE TAX ISSUESCORPORATE SELLER (CS)
potential liability to corporation tax on the chargeable gain arising from sale of the shares
SUBSTANTIAL SHAREHOLDING EXEMPTION (SSE) shares only
To Qualify:
1. Company held ≥ 10% of ordinary share capital for ≥ 12 consecutive months in the
6-year period before disposal; and
2. Company whose shares are being sold is a trading company / holding company of
trading group / sub-group throughout the period from the beginning of the 12-month
period until the date of sale
o Trading company / group = carrying on trading activities which do not include to a
substantial extent activities other than trading activities
Substantial = (> 20%)
Trading Activities = carried on in course of/for purposes of/ in prep for a
trade carried on by member of group/subgroup (excludes investment co.)
Satisfied = any gain on share sale NOT treated as a chargeable gain so NO corporation tax
payable by CS
o Any loss is not allowable loss for corporation tax purposes
Where either:
a) disposal is to a connected person (defined for tax purposes in s.1122 CTA 2010)
or
b) the trade has been transferred into a new company within previous 12mos
the co. whose shares are being sold must continue to be a trading co. (or holding co. of a
trading group or sub-group) immediately after the sale of the shares.
Hive down – co. transfers assets to newly incorporated sub + sells shares in sub i.e.
restructures business sale into share sale
o SSE applies where S has not held shares for ≥ 12 months, provided hived-down
assets previously used by S / group co. in trade
If conditions for SSE satisfied then no chargeable gain arises on sale of shares for S, EVEN
IF consideration in paper form (shares/loan notes)
o NO benefit is derived from tax deferral on share-for-paper exchange
If conditions for SSE satisfied then pre-sale dividend has no advantage (no tax liability
anyway)
, Tax deferral on share-for-paper exchange (S-4-P-X) (ROLLOVER / HOLDOVER RELIEF)
s.135 Taxataion of Chargeable Gains Act 1992 (TCGA)
Consideration may not be in form of cash – B may issue Shares or loan notes to S
if SSE not available, S may defer tax where:
1) Share Sale;
2) B holds, or as a result of exchange, will hold > 25% of T’s ordinary share capital;
3) Bona fide commercial reason for structuring the payment in shares/loan notes;
o i.e. B lacks cash so could only finance through shares/loan notes
4) not part of tax avoidance scheme
5) If Loan note - not redeemable until ≥ 6 months after their date of issue
o Any earlier, HMRC view as if consideration had been cash
Advance Clearance (AC) - May apply for AC from HMRC by giving full details of proposed
transaction
o Will grant if satisfied that paper issued as consideration for bona fide commercial
reason
o BUT does not guarantee relief, just that HMRC will not refuse on these grounds
App. must be made by T or B, even though benefits S
Effect of Consideration as Shares - ROLLOVER RELIEF
= S not treated as disposing of shares in T so no tax payable on T’s shares – instead, S
deemed to acquire shares in B @ same time + price as original shares in T
o Postpones S’s tax liability on sale of T’s shares until it sells shares issued by B
o S’s chargeable gain/loss for tax purposes calculated as difference between amount
paid for T’s shares and amount it sells shares issued by B
i.e. value of T’s shares on date of share sale irrelevant
Typically, S willing to accept shares as consideration if B is a listed co.
Base cost of shares issued as consideration = market value at date of issue
Effect of Consideration as Loan Notes - HOLDOVER RELIEF
= tax on any gain deferred until loan notes redeemed, sold or otherwise disposed of
o Suspends tax liability until loan notes redeemed
o S liable for gain/loss on redemption of loan notes (difference between original value
of loan notes and the value on redemption)
Typically S will accept loan notes if supported by guarantee from bank or security over B’s
assets
Pre-sale Dividend (PSD)
T declares PSD = effect of stripping some value out of T = less consideration paid by B =
reduced chargeable gain for S on the share sale = makes T more affordable
companies do not pay corporation tax on dividends received so PSD will be received tax-
free, reducing overall corporation tax liability
PSD only possible where there are sufficient distributable profits (s. 830 CA)
CHECK T’s balance sheet for these
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