SGS 3 (Tax and Consideration) Flashcards
3 benefits to Buyer and 2 to Seller of consideration in the form of shares?
B: cash flow, gearing ratio lowered, no obligation to pay dividends.
S: Shares may increase in value, may receive a dividend.
3 disadvantages to Buyer and Seller of share consideration?
B: Sh approval to issue new shares, existing SHs diluted, dividend payments not tax deductible.
S: If buyer not listed shares not freely transferable, shares may decrease in value, dividend not guaranteed.
3 advantages for Seller and 2 for buyer in using loan notes as a form of consideration?
B: aids cash flow, no dilution of SHs, interest payments tax deductible.
S: receives interest payments, greater certainty that sum will be achieved compared to shares.
Disadvantages to Buyer and Seller of using loan notes?
B: interest payments, increased gearing, may need to grant security.
S: deferred consideration, risk of non-payment.
A’s to Buyer and Seller of using an earnout?
B: can set off and use future profits to finance company (eases cash flow)
S: If T successful post-completion, more value may be received, most suitable for when S stays on in company and can influence T’s success post-completion.
D’s of earnouts?
B: seller may impose controls on how business is run, S remaining in business may attempt to maximise short term profits.
S: must wait for consideration, amount uncertain.
When does SSE apply and what are the conditions?
Applies to a Corporate SELLER in a share sale only.
S OWNED of at least 10% ordinary share capital of company
o for at least 12 consecutive months
o in the 6 years prior to disposal
Co whose shares are being sold must be a trading co or the holding co of a trading group for period from the beginning of the 12 month period mentioned above until the date of sale.
If SSE applies, what is the effect?
No corporation tax payable as no deemed gain.
What is the form of tax deferral for share consideration?
Rollover relief
defers tax until Target shares sold.
Buyer must hold over 25% of the target co’s ordinary share capital
Bona fide commercial reason for structuring the payment in shares
(i.e. wanting to acquire interest in target but lacking financial resources)
If rollover relief has been used to defer tax, how is tax calculated when they are later sold?
Gain (or loss) is calculated as difference between S’ base cost in Target shares and proceeds of sale of the shares in B.
What is the form of tax deferral for loan notes?
Holdover relief (defers until loan notes redeemed)
Buyer must hold over 25% of the target co’s ordinary share capital
Bona fide commercial reason for structuring the payment in loan notes
Loan notes must not be redeemable until at least 6 months after date of issue.
What happens if the third condition of holdover relief is no fulfilled?
HMRC treats the transaction as if it had been in cash as opposed to loan notes (CGT payable),
What needs to be considered if an individual qualifies for ER and tax deferral?
Shares - if ER available at sale but S defers, S only gets ER at subsequent sale if meets all conditions for the subsequent sale i.e. meets ER conditions in relation to shares they are selling (the buyer, not an employee of the buyer), therefore preferable to elect out of tax deferral to obtain advantage of ER.
ER conditions?
Selling shares in trading co.
Officer or employee
Owned 5% ordinary voting shares
All of the above for at least 12 months prior to disposal
£10m lifetime limit – could be exceeded if has made previous claim(s)
What is an earnout?
S receives additional further consideration at regular intervals following completion based on performance of Target post completion.
Only acceptable where INDIVIDUAL S is staying on and can influence business post completion (not good for companies as unable to get SSE)
Always also consider time value of money as it is a form of deferred consideration.
