X Ltd owns two residential apartment blocks, A and B, which it has owned for many years. It has recently received an offer for apartment block A. Mr X, who owns all the shares in X Ltd, has recently inherited the shares, and so has a high capital gains base cost. He would therefore prefer to sell the company, but needs to extract the retained property first. He has asked for advice on the best way to achieve this.
The first thing is to make sure of whether the sale of the company is the best route. It gives high base cost and also offers 0.5% stamp duty instead of SDLT, which even after the Autumn Statement will be at higher rates. However, typically purchasers require a discount for the tax liability in the company. Depending on the discount, the vendor can be better off selling the property. Property sale can be beneficial where the vendor doesn’t want to distribute proceeds, as it avoids effective tax at company and shareholder levels.
As the properties have been owned for many years, company sale will almost certainly be the better route.
The simplest structure would be to set up a Newco owned by Mr X and, immediately before sale, to transfer property B to Newco at market value. The inter-company loan would be repaid by Mr X out of proceeds for X Ltd. There would be a capital gains disposal by X Ltd and SDLT payable by Newco. The transfer is made immediately before the sale, so these crystallise only if the sale actually happens. These liabilities could be significant.
New holding company
A new holding company (Holdco) could be set up by Mr X to acquire X Ltd by share for share exchange. Property B is transferred from X Ltd to Holdco. Holdco sells X Ltd (with property A) to the purchaser.
The share exchange is achieved capital gains and stamp duty free, provided HMRC grants clearance under TCGA 1992 s 135. The transfer of the properties could be capital gains and SDLT free relying on group reliefs (TCGA 1992 s 171; FA 2003 Sch 7).
Holdco’s base cost in X Ltd shares would be market value at the date of exchange. HMRC does not normally grant clearance where a sale of the old company shares is to follow shortly after exchange. If the property has appreciated significantly since inheriting the shares, clearance may not be given.
Mr X could consider whether to do the share exchange without clearance. If clearance is not received, Holdco would still have a market value base cost in X Ltd, but Mr X’s transfer of X Ltd shares to Holdco would be taxable at 28%. As Mr X would have an uplifted base cost in Holdco, he would effectively recoup any tax payable on the exchange so long as he actually sold the X Ltd shares. In theory, Mr X could do the share exchange immediately before the sale. The problem here is that the transfer of property B to Holdco must occur before any arrangements are made to sell X Ltd. Otherwise Holdco may never acquire beneficial ownership of X Ltd so a tax group might not exist.
The sale of X Ltd by Holdco should not trigger any capital gains degrouping charge by virtue of Holdco leaving its capital gains group, under HMRC’s stated practice (see HMRC’s Capital Gains Manual at CG4510). Sale of X Ltd does not trigger an SDLT degrouping charge on property B, but a subsequent sale of Holdco would do so (FA 2003 Sch 7 para 4ZA).
New holding company/loan note
Mr X could consider transferring X Ltd to Holdco in exchange for a loan note. The loan note would be repayable following sale of X Ltd. An advantage of this route is that it leaves cash in Mr X’s hands.
No tax should arise on the exchange (TCGA 1992 s 116). Again, Holdco should have a market value base cost in the X Ltd shares, and so there remains a doubt whether HMRC would give clearance. However, as the repayment of the loan note will crystallise the same tax that would have been payable on sale of the X Ltd shares, this may make clearance more likely.
As above, the transfer of the properties to Holdco should occur before any arrangements are made to sell X Ltd.
Mr X should also apply for clearance under ITA 2007 s 701. As Mr X would be in broadly the same position as had he sold X Ltd, it seems reasonable that clearance should be given, even if the property has appreciated in value. The position is less clear if the loan note is not intended to be repaid in full following sale. Or what happens if the property isn’t sold at all? The safer view would be to assume that, even if s 701 clearance were given, it might not extend to any repayment of loan note beyond that following the sale if it happens.
Tax efficient demerger
Mr X could consider a tax efficient demerger. A statutory demerger would not work here, because X Ltd is not trading and the demerger would be in contemplation of a sale (see CTA 2010 s 1081). However, these do not prevent a s 110 liquidation demerger (Insolvency Act 1986 s 110). If there is time pressure to achieve the sale, the involvement of a liquidator will slow things down.
The demerger is normally achieved by placing a holding company (Holdco) above X Ltd. Property B would be transferred to Holdco. Holdco is liquidated and X Ltd is transferred to Newco A, while property B is transferred to Newco B. This should be achievable free of any capital gains or SDLT. This is a more complex structure, but proceeds are received directly by Mr X from sale of Newco A.
The best strategy for Mr X will depend on the tax involved in going down the simple route, and how much time is available to achieve the more tax efficient structures.
