Options to mitigate the tax due
Many business owners will be accelerating the sale of their company before 6 th April 2008 to lock into the beneficial 10% CGT rate. This works only to the extent that the consideration is given in cash .
Deferring part of the gain
If a fixed part is deferred leaving it as a debt rather than a formal note will bring the deferred consideration within the 10% charge (section 42 TCGA 1992). The overall charge will be set at 10% and the tax paid by the following January by which time the deferred consideration may have been paid.
Shares for shares
Where new shares are issued by the purchaser as part or all of the sale consideration the vendors' capital gain can be deferred until the new shares are sold.
Where it is forecast that the future value of the acquirer's shares would rise supported by the upside potential in the acquiring company it may be acceptable that the CGT rate paid at the time of disposal of the new shares is 18% with no taper relief or indexation as the growth in the new shares would more than compensate for the increase from the 10% charge on the value of the original shares.
Loan notes
Loan notes can be divided into qualifying corporate bonds (QCB) and those which are not (non QCBs). A QCB is exempt from CGT for an individual. If QCBs are issued in satisfaction of the proceeds of sale of shares, the gain crystallises at the date of sale and is held over until the QCB is redeemed.
A non QCB can be useful as any diminution in value of the non QCB will result in the reduction of the capital gain.
Loan stock must be issued on normal commercial terms particularly in relation to the interest rates applied.
Earn outs
Section 138A TCGA 1992 allows an earn out right in paper to be treated as a security and therefore the disposal is deemed to be paper for paper. This defers the gain on the receipt of the right to the earn out to the ultimate disposal of the new shares or loan notes earned through the earn out. If the disposal of this part of the consideration was after 5 th April 2008 then the capital gain would be taxed at 18% but as above this would afford some protection for both sides in the transaction where earn out potential is uncertain.
Becoming Non Resident
We have included a reference to this tax planning point here although the provisions in obtaining relief from UK CGT are complex. One important point "A concession will not be given by HM Revenue & Customs where an attempt is made to use it for tax avoidance." Depending on the territotity in which the taxpayer resides may mean more or less CGT due.
Conclusion
As you can see there are a number of options to deal with the capital gains and the associated tax that would arise on the disposal of a business and each of these can be used either on their own or in combination with the others depending on the circumstances of the case and the risks and rewards attached to the transaction from either side.
It has not been possible to go through all the details supporting each option referred to above and if you would require further advice on this topic please contact Charles Wiggin in our Corporate Finance Department on Charles@accountingservicesonline.net or call 0207 636 2430.
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