TAX Where the consideration is in the form of loan notes, there is an
additional (non-statutory) condition:
TAX ISSUES ON A SHARE SALE Loan notes should not be redeemable until at least 6
months after date of issue. If redeemable earlier, HMRC
EXAM STRUCTURE will view the transaction as if it had been in cash.
o Is the scenario a share sale or business sale?
o Who is receiving consideration / is consideration prima Effect of Tax Deferral:
facie chargeable to tax? As a general rule, a seller will only be prepared to accept
o What taxes will be payable? consideration in the form of shares in the buyer if the buyer is a
o How is it/are they calculated? listed company since the shares will be freely marketable.
o Are there any exemptions or reliefs?
o Apply any tests relevant to the exemptions or relief to For tax purposes the seller is not treated as disposing of the
the facts. shares in Target. Seller therefore does not pay tax on the sale of
o Conclude whether the exemption or relief applies on the the Target shares. Instead, Seller is deemed to have acquired the
facts. shares in Buyer at the same time and at the same price as the
o Consider Buyer tax issues e.g. stamp duty on shares, original shares in Target. This type of deferral mechanism is called
SDLT on real property. “rollover” and has two tax advantages for the seller:
TAX IMPLICATIONS FOR THE SELLER The seller’s tax liability on the sale of the Target shares is
Corporate seller – potential liability to corporation tax effectively postponed until Seller sells the shares it has
on the chargeable gains arising on the sale of the shares. been issued in Buyer; and
Individual seller – potential liability to capital gains tax Seller’s chargeable gain for tax purposes is calculated as
(CGT) on the chargeable gain arising on the sale of the the difference between the amount it originally paid for
shares. the Target shares (base cost) and the amount for which
No matter which party you are advising, they will always want to it sells the shares in Buyer – the value of the Target
try and minimise their tax liability. shares on the date of the actual share sale is irrelevant.
This means that if Seller’s shares in the Buyer decrease
in value, Seller will pay tax on a smaller gain that it
Sale by a Corporate Seller would have done if it had received consideration for the
Substantial Shareholding Exemption (SSE) Target shares in cash.
An important tax exemption that may apply when a company sells
shares in another company. In order for the seller to qualify for
SSE, the following conditions must be satisfied: Where the seller receives loan notes instead of shares, the tax on
The selling company must have owned (as opposed to any gain is deferred until the loan notes are redeemed, sold or
be disposing of) at least 10% of the ordinary share otherwise disposed of.
capital of the company whose shares are being sold, for
at least 12 consecutive months in the 6-year period If a seller accepts consideration in the form of loan notes, it should
before disposal; and require the loan notes to be supported by a guarantee from a
The company whose shares are being sold must be a bank (or listed parent of buyer) or security over the buyer’s assets.
trading company or the holding company of a trading
group or sub-group, throughout the period from the Relationship between SSE and share-for-paper exchange:
beginning of the 12-month period mentioned above If the conditions for SSE are satisfied then, even if consideration is
until the date of sale. in paper, no chargeable gain will have arisen on the sale of shares
for the seller, so there will be no benefit to be derived from the
If these conditions are satisfied, then any gain on the sale of the tax deferral on share- for-paper exchange.
shares is not treated as a chargeable gain and therefore no
corporation tax will be payable by the corporate seller as a result If conditions for SSE are satisfied the seller will have the benefit of
of the share sale. SSE whether the consideration is paid in cash, shares or loan
notes, so where consideration is paid in shares the base cost of
Trading company = a company carrying on trading activities which the shares issued as consideration will be their market value at the
do not include to a substantial extent activity other than trading date of issue.
activities and trading group is defined similarly.
Pre-Sale Dividend
Trading activity = generally excludes investment companies. It is also possible to reduce any corporation tax liability arising on
the sale of a company if the Target declares a pre-sale dividend.
Hive down = when a company transfers assets to a newly Lower consideration and lower chargeable gain.
incorporated subsidiary and sells the shares in that subsidiary to a
buyer, the sale of a business can be restructured as a share sale. No corporation tax liability will generally arise on a dividend paid
SSE can apply to the sale of shares even if the subsidiary is less to a UK company.
than 12 months old if the hive-down assets have previously been
used by the seller or another company in the group in a trade. Sale by an Individual Seller
SSE is only available to companies, any liability to tax on a
Tax Deferral on share-for-paper Exchange chargeable gain realised by an individual on a share sale cannot be
Buyer may issue shares in itself or loan notes to the seller (paper). avoided altogether – it can only be reduced or deferred.
If SSE is not available, the seller may still be able to obtain a tax Business Asset Disposal Relief (BADR) and Investor’s Relief (IR)
benefit if the consideration is in the form of paper. Here, the BADR may apply to reduce the rate of CGT liability of additional or
seller’s tax liability is effectively deferred until a later date = higher rate taxpayers to 10% when the following are satisfied:
rollover relief or holdover relief – s.135 TCGA. Target company must be a trading company (or holding
company of a trading group);
The rationale for the tax deferral is that where the seller has The individual disposing of the shares must be an officer
received consideration otherwise than in cash, it does not have or employee of the target company (or another
any cash proceeds with which to pay tax on any gain arising on the company in the same group);
disposal. The individual must hold at least 5% of the ordinary
shares in the target company, carrying at least 5% of
the voting rights;
Conditions for Tax Deferral (only applies on a share sale): The individual must be entitled to at least 5% of:
Generally, the buyer must hold, or, as a result of the o Profits available for distribution and assets on
exchange, will hold, over 25% of the target company’s winding up of the company; or
ordinary share capital; and o Disposal proceeds if the company is sold; and
there must be a bona fide commercial reason for All conditions must have been satisfied for 2 years immediately
structuring the payment in shares/loan notes and it prior to disposal.
must not form part of a tax avoidance scheme.
BADR does not automatically apply when the test are satisfied.
Bone Fide – buyer wished to expand by acquiring the interest in The individual seller must make a claim for the disposal by the first
target but lacked the available cash resource so financed by issue anniversary of 31 January following the end of the tax year in
of shares or loan notes. HMRC can give advance clearance on this which the disposal is made (e.g., a disposal in 2020/21 tax year
point if they so wish to the target or the buyer (not seller). must be made by 31 Jan 2023).
, Similarly, IR may apply to reduce the rate of CGT on disposal of
shares in a target company by a higher or additional rate taxpayer Tax effect
when: At completion a seller who is to received deferred uncertain
the shares being disposed of are fully paid ordinary consideration is treated by HMRC as receiving both:
shares and were issued to the individual for cash The sum actually paid on completion; and
consideration on or after 17 March 2016; A sum equal to the current value of the right to receive
the company is (and has been since the shares were further consideration.
issued), a trading company (or the holding company of a
trading group);
at the time of the issue of the shares, none of the Both A and B are taxed at completion in hands of the seller. When
company’s shares were listed on a recognised stock further consideration under the earn-out is received at some point
exchange (MM or AIM) after completion, the seller is treated as disposing of the chose in
the shares being disposed of have been held by an action, in return for the further consideration.
individual for at least three years from April 2016 (and If the consideration is less than the value attributed to
continuously since issue); and the chose in action by HMRC, the seller is treated as
the individual (or any connected person) is not (nor at making a capital loss – this can be carried back by an
any time has been from the date of issue of the shares) individual but not a corporate seller.
an officer or employee of the company (or of any If the consideration is greater than the value attributed
connected company). to the chose in action by HMRC, the seller is treated as
making a chargeable gain and liable to tax on that gain.
How this is treated depends on if the seller is corporate
The earliest disposal rate for IR to apply is 6 April 2019 due to the or individual:
three-year requirement. This reduces the CGT charge to 10%.
Even if a corporate seller qualified for SSE on a sale of shares,
Total amount of gains on which an individual may claim BADR disposal in a chose in action is not a disposal of shares and so the
during their lifetime is limited, currently to £1 million of benefit of SSE will not apply to this part. A corporate seller will
cumulative gains. IR limit is £10m, separate from BADR. unlikely to want to get involved in an earn out if they qualify for
SSE.
Tax Deferral available on share-for-paper exchange.
Tax deferral for share for paper exchange is available for For an individual it will be subject to CGT but no benefit of BADR
individuals also if: or IR on the disposal of the chose in action.
Generally, the buyer must hold, or, as a result of the
exchange, will hold, over 25% of the target company’s
ordinary share capital; and Retention Accounts
there must be a bona fide commercial reason for A retention is where part of the consideration is paid into a
structuring the payment in shares/loan notes and it retention account held under the joint control of the buyer and
must not form part of a tax avoidance scheme. the seller at completion instead of being paid to the seller,
especially if there is a possibility that there may be a claim against
the seller under the terms of the acquisition agreement.
Relationship between BADR and share-for-paper exchange:
If the seller disposes of shares in circumstance where he would
have qualified for BADR, but receives shares or loan notes issued For tax purposes HMRC will treat the seller as having received the
by the buyer, then the tax deferral applies unless the individual total amount of the consideration including the amount held in
seller elects otherwise. the retention account on the date of completion and will tax the
seller accordingly.
The problem is that when the individual sells the new shares or
redeems the loan notes, he will only get BADR if the BADR In the event that the seller does not actually receive the whole of
conditions are fulfilled in relation to the new shares or loan notes the consideration because the buyer does make a successful claim
issued by the buyer – very unlikely (as not an officer or employee) and is able to recover monies from the retention account, this is
treated as a subsequent adjustment to the consideration.
Advice client: Elect out of the tax deferral and instead pay tax on
the original share sale. Subsequent Adjustments to the Consideration
Warranty Claims
Where a sale of a company or business has been completed and the
Relationship between IR and share-for-paper exchange: buyer then makes a successful claim against the seller under the
If an individual holds shares which potentially qualify for IR in the warranties this will be treated as an adjustment to the purchase price
future, once holding them for three years, and he sells them for per s.49 TCGA.
share consideration, then tax deferral applies unless the seller
elects otherwise.
The effect of this is that the tax liability (if any) of the seller will be
correspondingly reduced as it will be regarded as having received less
Where potentially qualifying shares are exchanged for loan notes, consideration (so the seller will be entitled to receive a refund of any
IR cannot be claimed on the later redemption (or other disposal) overpaid tax) and the buyer’s base cost for the acquired company or
of the loan notes. This is because (unlike BADR) IR can only apply business will also be reduced.
on a disposal of ordinary shares, not other securities.
Indemnity Claims
Advice to client: elect out of tax deferral. But if the individual does When drafting indemnities, note Zim Properties Ltd v Proctor –
this before he held the potentially qualifying shares for three indemnities should be given in favour of the buyer, rather than
years, IR will not be available as the holding condition will not be the target, even though it is the target that would suffer the loss if
satisfied. the potential liability addressed by the indemnity crystallised.
Pre-sale dividends: Right to sue is an asset for CGT purposes – chose in action.
A pre-sale dividend will reduce CGT liability, and the pre-sale Resulting indemnity payment taxed as a capital gain if given in
dividend will be taxed as income tax (after £2,000 dividend nil- favour of target.
rate) so will then pay 7.5%; 32.5% or 38.1%.
However, where an indemnity payment is paid by the seller to the
Tax mechanisms available to both corporate sellers and buyer, HMRC have stated that the payment will be treated as an
individuals: adjustment to the consideration in the same way as a payment
Deferred Uncertain Consideration under a warranty per s.49 TCGA
It is possible to structure a transaction so that the seller does not
receive all the consideration at the date of completion. Where the
amount has not been agreed and is dependent on some Split Exchange and Completion
eventuality after completion, such as the future profits of the If there is a split exchange and completion, be careful that it
target company, it is known as deferred uncertain consideration. doesn’t straddle two tax years as different rates may apply.
e.g. an earn-out. Adjustments to completion accounts are not
deferred uncertain consideration as it is unascertained by Tax consequences of a company leaving a group
ascertainable. As the company is changing hands, it may itself have tax
implications for the seller if the target is a member of a group and
Taxation of deferred uncertain consideration. will therefore be leaving that group as a result of the sale.
Marren v Ingles – Right to receive additional consideration on the
happening of a specified event was a ‘contingent right to future When a company, which has received a chargeable asset as a
consideration’ and that contingent right was, in effect, a chose in result of an intra group transfer, leaves a group within six years of
action. the receipt of that asset, a charge may arise under s.179 TCGA.
