View the related Tax Guidance about Deferred consideration
Takeovers
TakeoversWhen one company acquires control of another company, this is called a takeover. This guidance note considers the capital gains tax (CGT) implications for shareholders of the company being taken over.The consideration paid by a purchasing company to the shareholder(s) for their shares in a target company could be either:•wholly in cash•new securities in the vendor in exchange for shares in the target company (a ‘share-for-share exchange’), or•a mixture of cash plus new securitiesCash considerationA chargeable gain or allowable loss will arise if all or part of the consideration given to the vendor on a takeover involves cash.Wholly in cashIf the old shares are exchanged for cash, this is a disposal of all of the original shares and a gain or loss will arise. This is calculated in the normal way using the share matching rules. For guidance on calculating the gain on share disposals, see the Disposal of shares ― individuals guidance note.Cash plus new securitiesIf the old shares are exchanged for a mixture of new securities plus cash, this is a part disposal for CGT. A gain or loss will arise on the cash element, but not on the securities element (as long as the share-for-share rules are not disapplied, see below). Wherever a part disposal arises, the allowable cost that can be deducted from the cash proceeds is calculated by using the formula:Where:•‘A’ is the cash received on the takeover•‘B’ is the market value of the new securities received•‘MV82’ is
Measures and methods of valuation
Measures and methods of valuationThe value of a company needs to be determined for commercial reasons, for example when the owners intend to sell the company. The main valuation methods are:•capitalised earnings•industry standard methods•net assets basis•discounted cashflow, and•dividend basedThese are discussed below.Capitalised earnings basisThe capitalised earnings basis of valuation is probably the most commonly applied technique in valuing private company shares. The calculation is based on future estimated benefits from the company usually measured as future maintainable earnings or possibly cash flow, which are then capitalised by using an appropriate capitalisation rate for that business.Future maintainable earningsFuture maintainable earnings are determined as follows:•determine the future anticipated profits:◦these should be calculated based on historic audited results◦if results are stable then the previous period’s results should be an acceptable basis for determining sustainable profits◦if results have fluctuated in the past then judgement will be required to
Utilising capital losses
Utilising capital lossesWhy capital losses are importantCapital losses are usually set against the capital gains that arise in the same year as the loss, reducing the total taxable gains for that year. Losses not used in this fashion are normally carried forward to be set against the next available gains.However, in certain circumstances, those losses may be blocked, restricted, carried back to earlier tax years or possibly treated as if they were income tax losses (see below).Where the taxpayer is subject to more than one rate of capital gains tax in a single tax year, they can choose which gains should be reduced by their capital losses so that their tax liability is reduced to the minimum possible.If a taxpayer makes a claim to defer chargeable gains for an earlier year, the use of losses may be disturbed, which can have a knock-on effect for several tax years.Capital losses must be quantified and claimed before they can be used. See the Use of capital losses guidance note for how capital losses arise and how to claim them.Identify special lossesWhere the taxpayer has made a capital loss, you first need to determine if the loss arises under one of the special circumstances that limit or expand the use of that loss, see below.EIS, SEIS or SITR investmentsEnterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS) are designed to encourage investment by individuals in unquoted trading companies. The social investment tax relief scheme (SITR, also known as SI tax relief)
Tax implications of share sale
Tax implications of share saleA business can be sold either by selling the shares in the company that runs it (a share sale) or by that company setting the trade and assets directly (an asset sale). See the Comparison of share sale and trade and asset sale for an overview of the main tax differences in these two sale structures.When a company is disposed of by way of a sale of its shares, its ‘history’ including its tax history is transferred along with the shares. The due diligence process aims to identify any contingent or hidden tax, commercial or financial liabilities which may potentially fall on the purchaser in the future. In addition to general tax risks, many companies deferred tax bills due to coronavirus (COVID-19), sometimes under bespoke arrangements. If that is the case, careful due diligence will need to be undertaken in order to determine exactly what has been deferred, when it is due and how the cost will be funded. If the tax due diligence uncovers material potential tax risks or liabilities, this may lead to:•negotiation of specific warranties or indemnities relating to the potential tax exposure in question in the sale and purchase agreement•a reduction in the price payable for the shares, or•a change to the structure of the deal to work around the potential issueIn a worst-case scenario where the potential tax liability is very large in the context of the transaction in question and outweighs the commercial benefits, the deal
Land and buildings ― buying and selling ― agricultural and forestry property
Land and buildings ― buying and selling ― agricultural and forestry propertyThis guidance note provides information on the VAT treatment of buying and selling agricultural property. Although the content of this guidance note mainly focuses on the VAT treatment of selling, most of the content is relevant to both the buyer and the seller.For guidance regarding the VAT treatment of buying and selling:•commercial buildings and civil engineering works, see the Land and buildings ― buying and selling ― commercial buildings and civil engineering works guidance note•dwellings, see the Land and buildings ― buying and selling ― dwellings guidance note•relevant charitable purpose buildings, see the Land and buildings ― buying and selling ― relevant charitable purpose buildings guidance note•relevant residential purpose buildings, see the Land and buildings ― buying and selling ― relevant residential purpose buildings guidance noteFor an overview of buying and selling generally, see the Land and buildings ― buying and selling ― overview guidance note.What is agricultural and forestry property?Agricultural property includes:•land that is used to grow crops or provide pasture for animals•land that is unused for a period, often referred to as fallow•farm buildingsLand on which trees are planted and harvested at least every 10 years, often referred to as short-rotation coppice, is also commonly regarded as agricultural property.Forestry property includes land:•on which trees are planted and harvested at least every 10 years, which may also commonly be regarded as agricultural property ― see above•on which any
Land and buildings ― buying and selling ― commercial buildings and civil engineering works
Land and buildings ― buying and selling ― commercial buildings and civil engineering worksThis guidance note provides information on the VAT treatment of buying and selling commercial buildings and civil engineering works. Although the content of this guidance note mainly focuses on the VAT treatment of selling, most of the content is relevant to both the buyer and the seller.In-depth commentary on the legislation can be found in De Voil Indirect Tax Services from V4.111 onwards.For guidance regarding the VAT treatment of buying and selling:•agricultural and forestry property, see the Land and buildings ― buying and selling ― agricultural and forestry property guidance note•dwellings, see the Land and buildings ― buying and selling ― dwellings guidance note•relevant charitable purpose buildings, see the Land and buildings ― buying and selling ― relevant charitable purpose buildings guidance note•relevant residential purpose buildings, see the Land and buildings ― buying and selling ― relevant residential purpose buildings guidance noteWhat are commercial buildings and civil engineering works?Commercial buildings are buildings that are not designed or used as dwellings or for a relevant charitable or residential purpose. The term ‘commercial buildings’ includes a wide variety of buildings including, for example, agricultural buildings, factories, hotels, offices, shops and warehouses. Civil engineering works include cables and pipes for power and water, bridges, roads and similar structures.What is the VAT treatment of sales of commercial buildings and civil engineering works?Depending on the facts, the sale of a commercial building or civil engineering work may
Preparing group for sale or acquisition
Preparing group for sale or acquisitionOften a company or group of companies has developed gradually over years, with different businesses being run within a single company or the group structure being overly complex for historic reasons. When a decision is made that a group, sub-group, single company, business or a collection of assets should be divested, it is often necessary to restructure in order to rationalise the structure and/or separate out the parts that are to be sold.This note considers the various issues that should be considered before a sale. Indeed, groups may wish to consider these issues periodically to ensure that their structure is suitable for a quick sale if the opportunity arises suddenly.However, many companies will not address them until a potential buyer has already been identified and commercial negotiations have already started. In that case, these issues should be considered alongside the factors that should be taken into account when deciding on the sale structure itself (see the Comparison of share sale and trade and asset sale guidance note). Note that even if an asset sale is preferred then it may still be sensible or commercially necessary to restructure the business so there is a single seller/sale by the individual shareholders and/or so it is clear that a separate, ongoing trade is being sold.Other guidance notes in this topic cover:•the tax implications of the sale structure, see the Tax implications of share sale and Tax implications of trade and asset sale guidance notes•some specific
Company reorganisations ― overview
Company reorganisations ― overviewThis guidance note summarises some of the ways in which companies may reorganise their activities and some of the key tax considerations.A company may want to reorganise its activities or its share structure for a number of different reasons. The most common are to prepare for a sale (as often a buyer will want a new ‘clean’ company to hold the trade) or to return capital to investors.In addition to the reorganisations discussed below, a company may also undergo a demerger process. In simple terms, a demerger involves the separation of a company’s business into two or more parts, typically carried on by successor companies under the same ownership as the original company. For more details of demergers, see the Demergers - overview guidance note.Share for share exchangeA share for share exchange occurs when shares in one company are sold in exchange for new shares in the purchasing company. This type of transaction may also be called a ‘paper for paper’ transaction, as the consideration may also be loan notes as well as (or instead of) the issue of new shares.Usually, a transaction of this type (where at least 25% of the original company are being sold) will be structured to fall within the reorganisation provisions relating to capital gains tax. The conditions that must be met to fall within this treatment and the tax effect of doing so are set out in the Share for share exchange guidance note and guidance on the clearance application
A to Z of land and buildings terminology
A to Z of land and buildings terminologyThe following list, while not exhaustive, provides an overview of the meanings of commonly used terms that a business and / or its adviser may encounter when dealing with a land and property transaction:TermDefinitionAlienation clauseClause restricting the tenant’s right to assign a lease or sublet a propertyBeneficial occupationThe occupation of land to the benefit or advantage of the occupierBeneficial ownerA party that has title to the land for their own benefitCharge certificateThis is the certificate issued by the Land Registry to the mortgage lender showing the charge on the Land RegistryChargeThis is an interest in land which secures payment of a debtChattelsMoveable personal propertyCompletionThis is the final step which leads to the transfer of ownership of a property. The purchaser receives the title documentation in exchange for payment of the purchase priceCompletion moniesThis is the sum payable to the vendor to complete the purchase of the propertyCompletion statementThis is a statement issued to the buyer showing details of the exact amount that must be paid to complete the purchaseCompulsory registrationWhere legally required in England and Wales, the transfer of land must be registered with the District Land Registry when the transfer is completed. If the land is not currently registered, an application for first title will need to be prepared and submittedContractThis is a legally binding document that must be signed by the seller and purchaser (two copies are normally made). Exchanging the document binds
Share for share exchange
Share for share exchangeThis guidance note considers the capital gains tax implications where shares are sold in exchange for new shares, including the specific reorganisation rules.Possible types of consideration for share purchasesThe consideration paid by a purchasing company to the shareholder(s) for their shares in a target company could be in the form of either:•new shares in the purchasing company in exchange for shares in the target company (a 'share for share exchange')•cash•loan notes issued by the purchasing company•a mixture of the aboveThis guidance note covers the tax implications of consideration in the form of shares or a mixture of shares and cash. For details on the tax implications of consideration in the form of loan notes, see the Loan notes and Qualifying Corporate Bonds (QCBs) and non QCBs guidance note.The timing of the consideration also needs to be considered. Consideration may be paid straight away or it may be deferred. Deferred consideration may be fixed or the amount may be variable. For more information on these, see the Tax treatment of earn-outs and deferred consideration guidance note.Relief from stamp duty (under FA 1986, s 77) is available on a share for share exchange provided certain conditions are met. It should be noted that the relief is not automatic but instead must be claimed. See the Stamp duty ― corporate transactions guidance note for further details.Share for share exchangeShareholders who dispose of their shares in exchange for shares in the acquiring company may be eligible
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