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Structuring A Transaction Notes

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FACTORS AFFECTING CHOICE OF ACQUISITION FOR SELLER SHARES

Clean break from Business

Scope of warranties and DD

Bigger scope as most contingent tax liabilities transfer to the buyer.

Simpler - Stock Transfer Form. Although may need 3rd party consent to change &
company contracts may terminate on change of control of company.

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 No direct effect on contracts of employment. No direct interest unless warranties given in SPA. Cash paid directly to seller as SH. Single Tax (CGT)

Transfer of title

FSMA restrictions



Employees Extracting cash

ASSETS

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



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.


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.

If TUPE applies obligations transferred to buyer. If not, seller still has obligations.




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.

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 Smaller scope as most contingent tax liabilities remain with the seller


Cash paid to Co. Double Tax (CT +
CGT/IT). 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

Incom e 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

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higher the seller's final income assessment will be will.

Sales in consideratio n for shares

CGT

Sales for cash

Sales in consideratio n for shares

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 : o carried across against profits in final tax year; then o 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 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 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. 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.

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