CheckLists.Tax (beta)
G2: Acquisition of shares
Valuation
​
- Sale to company in return for shares in company (query whether shares worth less)
​
- Minority interest in company owning listed shares is worth less than outright ownership of the equivalent number of shares (Battle).
- Even sale in return for 98% was thought to carry a 2.5% discount (Battle at 93).
Legislation:
Cases: Battle v. IRC [1980] STC 86;
HMRC manuals:
Commentary:
See also:
​
INCOME TAX
​
Settlements code
​
- Joint purchase where share entitlement does not correspond to contribution: settlement
​
- If A and B buy an asset together and their ownership shares do not reflect their contributions either:
(1) There is constructive/resulting trust if no gift was intended; or
(2) There was a gift, and thus a settlement.
- Patmore: "[86] ... If Mrs Patmore had intended to give up her entitlement to shares in the company in favour of her husband and take no recompense, such that the issue of the B shares and the later dividends paid to her by the company, but at Mr Patmore’s direction, really were gratuitous, then Mrs Patmore herself would have created a settlement on her husband. She would have settled half of the 85 shares purchased on him."
- On the facts, there was a constructive trust.
- Query whether outright gift between spouses exemption applies to the facts.
​
Legislation:
Cases:
Patmore v. HMRC [2010] UKFTT 334 (TC), Judge Mosedale;
HMRC manuals:
Commentary:
See also:
​
- Preference shares allotted to spouse/children treated as a settlement
- Copeman v. Coleman - Preference shares entitled to 10% preferential dividend allotted to children of shareholder/spouse for £10, subsequent dividend of £40 declared. Held: this was a settlement
- "it is impossible to come to any other conclusion but that this was not a bona fide commercial transaction, and it appears to me that there was a disposition within the meaning of the definition in Sub-section (9), or an arrangement in the nature of a disposition within the meaning of that Sub-section".
- Young v. Pearce - preference shares with no voting rights but right to 30% net profit, allotted to wives of shareholders, was a settlement.
- Settlement was (probably) of the shares rather than the dividend they generated.
- Preference shares had no voting rights, so they were substantially a right to income. ​
​
Legislation:
Cases:
Young v. Pearce [1996] STC 743;
HMRC manuals:
Commentary:
See also:
​
- Parents arranging for minor children to have shares (settlement)
​
- In Bird, the parents arranged for their minor daughters to take 60% of the shares in a company. Held to be a settlement.
- Further, father was settlor even though he used his position as executor of father's will to direct funds 'on behalf' of the children to the company by way of loan (§25).
​
Legislation:
Cases:
Bird v. HMRC [2008] UKSPC 720;
HMRC manuals:
Commentary:
See also:
​
Transfer of assets abroad
​
- Acquisition of existing non-resident company not, of itself, a relevant transfer
​
- If T purchases an existing, non-resident company:
(1) No income arises to the non-resident company as a result of the purchase of its shares.
(2) Insofar as paying the purchase price is a relevant transfer, the purchaser will, generally, not have any power to enjoy the vendors income.
- Accordingly, TOAA should not apply to the income of the company by virtue of the acquisition alone.​
​
Legislation:
Cases:
HMRC manuals:
Commentary: Chamberlain §12.34;
See also:
​
Transactions in securities
​
- Acquisition of insolvent company with intention to fund it to repay worthless debts caught
​
- Bamberg v. HMRC [2010] UKFTT 333 (TC) - T bought an insolvent company and debt owed by that company before selling the company to his own company that lent money to the insolvent company to allow its debts to be repaid.
Legislation:
Cases: Bamberg v. HMRC [2010] UKFTT 333 (TC);
HMRC manuals:
Commentary:
See also:
​
EMPLOYMENT INCOME TAX
​
Acquisition by employee/prospective employee for less than MV
​
- General earnings charge
​
- Where shares or securities are acquired as a reward, inducement or incentive for existing or future employment, the convertible value of those shares/securities (less anything paid for them by the employee) will be treated as general earnings.
- Consider also the residual charge under the benefits code, albeit query what value that can give rise to if the shares are newly issued.
- If the employee undertakes an obligation to pay the value of the shares at a later date, there may not be general earnings, but the employment-related securities code needs to be considered.
- If the unrestricted market value exceeds the convertible value, consider the employment-related securities code.
- The charge to general earnings takes priority over the employment-related securities code charge (but the latter covers any excess value not taxed as earnings) (s.446V). See the example at ERSM70120.
- No immediate general earnings charge if securities are forfeitable, unless s.431 election is made (ERSM70120 example 3).
Legislation: ITEPA 2003, s.62;
Cases:
HMRC manuals: ERSM70010; ERSM70120;
Commentary:
See also:
​
- Employment-related securities code for acquisitions at less than market value (Chapter 3C)
​
- Deemed notional loan where employee acquires securities in return for payment (at or before acquisition) that is less than their MV (s.446Q(1)).
- Obligations to pay in future are ignored (s.446Q(2)).
- MV means the market value if fully paid up, so the code applies to partly paid shares (s.446Q(3)).
- In relation to forfeitable securities, the acquisition date is treated as deferred in accordance with s.425 (s.446Q(4); ERSM70100 example at ERSM70120).
- Acquisition date not deferred where s.431 election made (ERSM70120, example 3).
Legislation: ITEPA 2003, s.446Q;
Cases:
HMRC manuals: ERSM70100; ERSM70120;
Commentary:
See also:
​
- > Query whether payment in kind rather than money means securities acquired for less than MV
​
- Payment appears not to include payments in kind (see s.421(2)).
- Query the effectiveness of sale of an asset for cash sum and offset of the purchase price (Killik, §92).
​
Legislation:
Cases: Killik & Co LLP v. HMRC [2023] UKFTT 653 (TC);
HMRC manuals:
Commentary:
See also:
​
-> Exceptions
​
- Company employee controlled by virtue of holdings of shares of the class + all the shares in the class are acquired for less than MV (s.446R(3)).
- Majority of shares of that class are not, at the time of acquisition, employment-related securities + all the shares in the class are acquired for less than MV (s.446R(4)).
- > Query whether partly paid shares are a different class or not (CG50203; CG50207; STSM999999).
- Public offers
- 7 years after leaving employment
Legislation: ITEPA 2003, s.446R;
Cases:
HMRC manuals:
Commentary:
See also:
​
- > Annual charge on benefit of notional loan
​
- If Chapter 3C applies, interest-free loan treated as having been made to the employee by the employer at the time of the acquisition and the employment-related loan provisions apply accordingly (ITEPA 2003, 446S).
- Amount of loan is MV of securities (assuming fully paid up) less deductible amounts (s.446T).
- If less than full ownership acquired, MV is based on value corresponding to that interest (ERSM70050).
- Deductible amounts include: payments made for acquiring the securities and amounts treated as employment income under other provisions (s.446T(3)).
- No annual charge where acquisition is of shares in a close company where conditions for relief in ITA 2007, s.392 would apply if interest actually paid (s.446S(3), s.178).
- Even if exception to annual charge applies to interest charge, tax may still be due on discharge of the loan.
- Annual charge ceases if employment ceases (ERSM70130).
Legislation: ITEPA 2003, s.178, s.446S; ITA 2007, s.392;
Cases:
HMRC manuals: ERSM70040; ERSM70050; ERSM70130;
Commentary:
See also:
​
- > Immediate charge on full under value where shares acquired as part of tax avoidance​
- If the shares are made available as part of an arrangement with a main purpose of avoiding tax, there is no notional loan and, instead, the amount of what would have been the notional loan counts as employment income immediately.
Legislation: ITEPA 2003, s.446UA
Cases:
HMRC manuals: ERSM70200;
Commentary:
See also:
​
CORPORATION TAX
​
Close companies
​
- Deemed loan where close companies acquire control of a company that has made a loan or advance
​
- Company that made loan deemed to have made it immediately after control acquired by the close company (CTA 2010, s.460).
- If control is acquired by two or more close companies, the loan is deemed to be made by each of those close companies and apportioned between them (CTA 2010, s.460).
- Query whether the above applies if the company that made the loan was not, at that time, controlled by another company (s.460(1)).
- Exclusion where no connection between the making of the loan and the acquisition of control and/or the funding to the company that made the loan (CTA 2010, s.461).
- The intention is to limit this deeming to cases in which "a loan by the controlled company is clearly related to an application of the controlling company's own funds" (CTM61740).
- Consequential adjustments to operation of legislation in CTA 2010, s.462.
Legislation: CTA 2010, s.460 - 462;
Cases:
HMRC manuals: CTM61720; CTM61730; CTM61740.
Commentary:
See also:
​
XX
​
Purchase by a company of its own shares​
See G7: Purchase of own shares
​
​
Purchase of shares in related company
​
As a mechanism for extracting funds from an existing company
It might be proposed that:
(1) Newco established
(2) Newco purchases X Ltd in return for issuing shares and cash to the shareholders of X Ltd.
(3) The cash derives either from profits of X Ltd distributed to Newco or money borrowed by Newco.
It is likely to be difficult to get clearance under the transactions in securities rules for such a proposal if the recipients of the cash do not materially reduce their effective shareholdings.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
​
???Deduction of expenses incurred in respect of acquisition of shares
​
Expenses incurred in deciding whether to sell or acquire asset are expenses of managing of an investment business
- applies to holding companies and intermediate holding companies (s.1218(1))
- no deduction for expenses of a capital nature (s.1219(3)).
- But "capital" has a more limited meaning: "In our view it is aimed at expenses which do not normally recur, but which have the effect of creating, enhancing or disposing of a capital investment. It does not exclude expenditure which informs decision-making and the exercise of managerial discretion." (Centrica, §127)
- expenses of management are likely to be revenue where the company has more than one investment (Centrica, §128).
- must be expense of management of the investment of business of the company claiming relief (Centrica, §47).
- does not require directors in a group of companies to formally act in their capacity as director of the company with an investment business (Centrica §60).
- No reason why investment business of intermediate holding company should not be managed on behalf of that company by individuals employed by the ultimate holding company (Centrica, §63).
- expenses incurred in deciding whether to acquire or dispose of an asset are expenses of management (Centrica, §83).
- expenses incurred on the mechanics of implementation once the decision to acquire or dispose has been taken are not expenses of management (Centrica, §83).
- no cut off date, it is the nature of the expenditure that is important, rather than when it was incurred, but timing may be indicative (Centrica, §89).
- How to realise value of investment may be inextricably linked with the question of whether to realise the value (Centrica, §93).
- Success fees referable to the outcome are not management fees whereas success fees referable to the value of the service are (Centric, §112).
- A fee dependent on successful completion of the disposal but in substance for the service of deciding whether and how to dispose is not part of the cost of disposal and is a management expense (Centrica, §113).
Legislation: CTA 2009, s.1219;
Cases: Centrica Overseas Holdings Ltd v. HMRC [2021] UKUT 200 (TCC);
HMRC manuals:
Commentary:
See also:
​
​
INHERITANCE TAX
Shares in UK residential land rich close company not excluded property
​
- An interest in a close company is not excluded property to the extent that its value is attributable to a UK residential property interest.
- Includes indirect attribution through the company having an interest in a close company, a partnership or certain loans.
- Close company includes a company that would be a close company if it was UK resident (para 9(1)).
Legislation: IHTA 1984, Schedule A1.
Cases:
HMRC manuals:
Commentary:
See also:
​
- Exclusion for interests of less than 5%
​
- The non-excluded property treatment does not apply to an interest if the value is less than 5% of the total value of all interests in the close company.
- For this purpose, aggregate with the value of any connected person's interests (para 2(4)).
​
Legislation: IHTA 1984, Schedule A1.
Cases:
HMRC manuals:
Commentary:
See also:
​
- Liabilities apportioned rateably
​
- To determine whether/to what extent the value of an interest is attributable to UK residential property, liabilities are attributed rateably to all property.
Legislation: IHTA 1984, Schedule A1.
Cases:
HMRC manuals:
Commentary:
See also:
​
- Targeted anti-avoidance rule
​
- When determining whether/to what extent property is excluded property, disregard any arrangements with a main purpose of securing a tax advantage by avoiding or minimising Schedule A1.
Legislation: IHTA 1984, Schedule A1, para 6.
Cases:
HMRC manuals:
Commentary:
See also:
​
- Limited disregard of double taxation arrangements
​
- Double tax arrangements are overriden if they are with a territory that does not charge inheritance tax/something similar, or the effective rate is 0%.
Legislation: IHTA 1984, Schedule A1, para 7
Cases:
HMRC manuals:
Commentary:
See also:
​
Gift with reservation of benefit
​
- Bonus issue of securities treated as addition to the gifted property
​
- Bonus issue of securities are treated as an addition to the gifted property (Sch 20, para 2(6)).
- Value reduced by consideration given by donee (para 3),
- But not any consideration consisting in the capitalisation of reserves or which is provided directly or indirectly out of the assets or at the expense of the company or an associated company.
- And not any consideration consisting of property treated as subject a reservation in respect of the same donor (para 3(1)(b)).
Legislation: FA 1986, Sch 20;
Cases:
HMRC manuals:
Commentary:
See also:
​