FACTORS AFFECTING CHOICE OF ACQUISITION FOR SELLER
		SHARES		ASSETS
Clean break from Business		No further liabilities for the Seller However, possible right of comeback for buyer to remedy undisclosed problems & seller may have given guarantees (e.g. to bank for lending). Negotiate out of all liabilities to get true clean break		Legal liability to third parties for debts and obligations of business remains with seller Applies if buyer has contracted to assume responsibility for certain liabilities. Right of indemnity, but not always concrete
Scope of warranties and DD		Bigger scope as most contingent tax liabilities transfer to the buyer.		Smaller scope as most contingent tax liabilities remain with the seller
Transfer of title		Simpler – Stock Transfer Form. Although may need 3^rd party consent to change & company contracts may terminate on change of control of company.		More complex - Each separate asset of the business must be transferred, 3^rd party approval (e.g. landlord). Land & IP need transfer title, loose plant = title transferred by delivery.
FSMA restrictions		More onerous - s21 restricts issue of ‘an invitation or inducement to engage in an investment activity’ Includes advising/arranging purchase/sale of shares. Any communication/approach about this would be caught by this restriction.Exceptions (p5) Breach = sale unenforceable		S21 doesn’t apply. However, if decision to choose assets over shares is taken at a late stage, then still have to comply even if it proceeds as a sale of assets.
Employees		No direct effect on contracts of employment. No direct interest unless warranties given in SPA.		If TUPE applies obligations transferred to buyer. If not, seller still has obligations.
Extracting cash		Cash paid directly to seller as SH. Single Tax (CGT)		Cash paid to Co. Double Tax (CT + CGT/IT).
Tax See more detailed notes p2-3		Individual = CGT – chargeable asset. Entrepreneur’s relief. EIS relief available. Emigration & share for share exchanges available Not qualifying assets, so no roll over from CGT/CT (s152 TCGA 92). Company = substantial shareholding(see p 3 for details) or share for share exchanges relief. EIS relief not available.		CT for selling company (if income/gain is made). If SH = individual distributed in winding up = CGT (entrepreneur’s relief available = attractive) If dividend = IT (more tax efficient) If SH = company, common reliefs = substantial SH exemption (disposal) and group relief on intra-company dividend (distribution). Roll over relief from CGT/CT (s152 TCGA 92) Balancing charge considerations for WDA (see p2)
TAX IMPLICATIONS FOR ASSET ACQUISITION – SELLER OF AN UNINCORPORATED BUSINESS
TAX	TYPE OF SALE		IMPLICATION
Income tax	Sales for cash		Closing year rules – sale results in discontinuance of business carried on by seller – assessed on profits made from the end of the latest accounting period to be assessed until the date of sale, less deductions for overlap profit (i.e. if any profit has been charged to tax in two successive years).
			Stock – The more consideration that is apportioned to the sale of trading stock, the higher the seller’s final income assessment will be will.
			Balancing Charges – If price paid exceeds WDA of assets, will be subject to balancing charge = excess amount is treated as income profit. In the alternative, HMRC will give an allowance. The more consideration that is apportioned to the sale of plant and machinery, the higher the seller’s final income assessment will be will.
			Relief for losses Carry forward (s83 ITA 07) does not apply as losses can only be set against future profits of the trade which the seller no longer partakes in. Terminal loss relief (s89 ITA 07) can be claimed if taxpayer suffers trading loss in final 12 months of trading – can include unrelieved capital allowances. Generates repayment of tax Loss can be : carried across against profits in final tax year; then carried back against profits of the same trade for 3 yrs (most recent first) prior to final tax yr. Carry across/carry back (s64 – 71 ITA 07) can be used to set trading losses made in year of sale against any income or chargeable gains which he has in that/previous yr. Can’t form part of s89
	Sales in consideration for shares		Carry forward of unrelieved trading losses – s86 ITA 07 Business sold to company wholly or mainly for shares (at least 80%), seller can carry forward any unrelieved trading losses and deduct income received from the company. Deduction from any salary paid as an employee first, then any dividends paid to him as a SH. Available in any year which the seller retains beneficial ownership of the shares
CGT	Sales for cash		Entrepreneur’s relief – 10% = max reduction of 10m of qualifying net gains realised. Qualifying business disposal: Disposal of the whole or part of business where business is sold as a going concern and seller has owned the interest in the business as a whole for a yr before disposal Disposal of Co. shares by an employee or officer of the Co., if Co. is trading co and seller’s personal company (at least 5% ordinary share capital and 5% voting rights) and owned shares for a yr
			Annual Exemption - 10,600 for 12/13 tax year
			Roll-over relief on replacement of business asset (ss152-158 TCGA 92) Can elect to roll over within 1 yr before or 3 yrs after the sale of the business or partnership share. CGT deferent until replacement assets are disposed. Qualifying asset = land/buildings used for trade, goodwill, fixed plant. NOT SHARES Relief restricted if assets sold have not been used for trade all the time or if only some of the proceeds are reinvested in qualifying replacement assets Partner who allows his firm to use asset can claim relief on selling if he reinvests in qualifying asset. Seller can’t use annual exemption to reduce gain rolled over.
			Deferral relief on reinvestment in EIS shares Can claim unlimited deferral. Disposal can be sale or gift. Available where EIS shares are acquired for cash within 1 yr before or 3 yrs after disposal Can apply entrepreneur’s relief before deferring.
	Sales in consideration for shares		CGT roll-over into shares s162 TCGA 92 Allows seller to roll over any chargeable gains on the sale into shares issued by the company in consideration Postpones CGT until former proprietor of the business disposes shares in the company. Deemed, to have acquired the consideration shares at the same time and for thesame price as the original shares. All assets (not liabilities) of the business except cash must be transferred to the company. If seller receives part cash, CGT liability arises, but can offset this against any capital losses brought forward from previous years
CT IMPLICATIONS FOR ASSET ACQUISITION – SELLER OF A BUSINESS BY A COMPANY
Capital gains on chargeable assets: Indexation allowances remove inflationary gains. Profit on intangible fixed assets (e.g. goodwill) will generally be treated as income receipts for corporate sellers. Can reinvest in qualifying business asset and get roll-over relief (s152 TCGA 92)
Income profits: On sale of trading stock and intangible fixed assets Right for company to carry forward trading losses (s45CTA 10) If Co ceases trade, a trading loss sustained in final 12 months may be set against income or capital profits of same acc/period or, if loss is not fully relieved, can be carried back for max 3 years, provided Co was then carrying on same trade No entrepreneur’s or EIS Shares relief available.
Balancing charges: Disposal of business will = adjustment to CT relief given on those assets in form of balancing allowance or balancing charge
Extracting Cash Cash paid to Co. Double Tax for individual SH. (CT (when Co receives ) + CGT (via liquidating Co)/IT (via taking a dividend). If there is a corporate SH, unlikely to get taxed for extracting cash as no CT on receipt of a dividend from a subsidiary. Distribution on a winding up likely to = SSE & distributing by dividend likely to = group relief on intra-co dividends. Where shareholding will not qualify on disposal from exemption from tax as a substantial shareholding, pre-liquidation dividend will be most tax-efficient method of distributing proceeds of sale Ensuing liquidation less likely to give rise to CGT/CT charges as distribution has reduced value of shares.

Emigration

An individual seller who sells shares whilst neither resident nor ordinarily resident in the UK can avoid a charge to CGT
Individuals will be subject to CGT if they (s10A TCGA 92):
- have been resident in the UK for any part of at least four out of the seven tax years immediately preceding the tax year in which they left the UK; and
- have been not resident & not ordinarily resident for a period of less than five full tax years between the year of departure and the year of return; and
- own the assets disposed of before they leave the UK.
A gain made in the tax year of departure will be assessed in that tax year. A gain made after thedate of departure will be assessed in the tax year of return to the UK. The scope for taxplanning in this area is very limited

Share for Share Exchanges (s135 TCGA 92)

Allows seller (individual or corporate) to roll over any chargeable gains on the sale into shares issued by the company as consideration
Postpones CGT/CT until former proprietor of the business...

#10220 - Structuring A Transaction - Mergers and Acquisitions (Private Acquisitions)

About Oxbridge

More Mergers And Acquisitions (Private Acquisitions) Samples