07. BPT - Companies: Special Situations

Question 1

What must a company have available to be able to buy its own shares back from SH?

Answer 1

Must have sufficient distributable reserves

If the reserves are too low, a public company is simply not allowed to do a share buyback

Question 2

If private company wants to buy back shares but doesn’t have the reserves, what can they do?

Answer 2

They can still buy the shares back as long as its directors make a declaration of solvency (the extent to which the payment exceeds the available reserves is known as permissible capital payments)

Question 3

What are permissible capital payments?

Answer 3

To extent to which the payment exceeds the available reserves when a comp doesn’t have enough reserves for share buybacks

Question 4

What should you assume happens to shares when they are bought back?

Answer 4

They are normally then cancelled - unless you are told otherwise

But if they aren’t cancelled, the company itself can hold those shares ‘in treasury’. But for tax purposes, they are still treated as cancelled

Question 5

What is the tax treatment for a repurchase of shares?

Answer 5

A gain is calculated as normal, although SSE may apply

Depends on the route (no choice):
Capital route: Calc gains as normal

Income route:
- 2 calculations required
» Capital: an amount equal to original subscription price of the shares is treated as proceeds in a gains calc

> > Income: The diff between the proceed and subscription price is taxed as a div

Question 6

When is the capital route conditions compulsory for share repurchases?

Answer 6

• The repurchase is in order to raise cash to pay IHT
  1) The person selling is/sher shares must use all, or virtually all, of the proceeds to pay an IHT liability arising on death
  2) IHT couldn’t otherwise be paid without causing undue hardship
  3) The payment of the tax must be within 2 years of death
  OR
• The repurchase is for the benefit of the trade
  1) Comp must be unquoted trad comp, or holding comp of a trading group
  2) Comp must be able to demonstrate that the repurchase is for the benefit of the trade and not part of tax avoidance scheme
  3) Indivs must be resident in UK
  4) Have owned the shares for 5 yrs prior to repurchase (or 3 yrs if inherited)
  5) Reduce their SH substantially after buyback

Question 7

When the capital route is compulsory for share repurchases because the repurchase is in order to raise cash to pay IHT, what conditions create this condition?

Answer 7

1) The person selling is/sher shares must use all, or virtually all, of the proceeds to pay an IHT liability arising on death
2) IHT couldn’t otherwise be paid without causing undue hardship
3) The payment of the tax must be within 2 years of death

Question 8

When the capital route is compulsory for share repurchases because the repurchase is for the benefit of trade, what conditions create this condition?

Answer 8

1) Comp must be unquoted trad comp, or holding comp of a trading group
2) Comp must be able to demonstrate that the repurchase is for the benefit of the trade and not part of tax avoidance scheme
3) Indivs must be resident in UK
4) Have owned the shares for 5 yrs prior to repurchase (or 3 yrs if inherited)
5) Reduce their SH substantially after buyback
» SH must end up with
»> No more than 30% of shares in como
»> No more than 75% of prev percentage holding

Question 9

What is the difference between an administrator and a liquidator?

Answer 9

Administrator:

• appointed to give a comp breathing space from its creditors
• Will attempt to save the company if possible
• If the comp can’t be saved then it’ll enter into liquidation

Liquidator
- Winds up the company by realising the assets and distributing the funds realised to the creditors of the comp in order of priority

Question 10

What does a liquidator do?

Answer 10

• Winds up the company by realising the assets and distributing the funds realised to the creditors of the comp in order of priority

Question 11

What does an administrator do?

Answer 11

• appointed to give a comp breathing space from its creditors
• Will attempt to save the company if possible
• If the comp can’t be saved then it’ll enter into liquidation

Question 12

What are the tax implications of appointing an administrator?

Answer 12

• A new acc period begins on the date the administrator is appointed
• Future acc periods end on the normal acc date and when the company ceases to be in administration

Question 13

What are the tax implications of appointing a liquidator?

Answer 13

1) liquidator becomes responsible for tax implications for the comp
2) liquidator fees aren’t allowable costs when calc TTP of comp. Costs kf termination payments to e’res made redundant are allowable (but capped at 4x stat redundancy)
3) new acc period will start date liquidator is appointed & ends earlier of 12m later or end of winding up process.
4) Future distributions to SH will be capital
5) If parent comp is put into liquidation, group relief stops (gains group remains effective until date of final distribution)
6) In an insolvent liquidation the deductions allowance is increase

Question 14

What are the tax implications of appointing a liquidator?

Answer 14

1) liquidator becomes responsible for tax implications for the comp
2) liquidator fees aren’t allowable costs when calc TTP of comp. Costs of termination payments to e’res made redundant are allowable (but capped at 4x stat redundancy)
3) new acc period will start date liquidator is appointed & ends earlier of 12m later or end of winding up process.
4) Future distributions to SH will be capital
5) If parent comp is put into liquidation, group relief stops (gains group remains effective until date of final distribution)
6) In an insolvent liquidation the deductions allowance is increased by the net chargeable gains in the period (or amount of cfwd cap losses if lower). This means bfwd cap losses can be offset in full in a winding-up period. Gains transferred from another group comp (or arising due to nil gain transfer from another group comp) are not incl in the net gains figure for this purpose. The increase applies from 1 Apr 2020

Question 15

Who becomes responsible for the tax obligations of the company when a liquidator takes over?

Answer 15

The liquidator

Question 16

Are liquidators fees and termination payments allowable when they have been appointed?

Answer 16

liquidator fees aren’t allowable costs when calc TTP of comp. Costs of termination payments to e’res made redundant are allowable (but capped at 4x stat redundancy)

Question 17

Once a liquidator has been appointed, what are all future distributions to shareholders

Answer 17

They will all be capital

Question 18

If a parent company goes into liquidation, how does it affect group relief and gains groups?

Answer 18

Group relief stops

But gains groups remain effective until the date of the final distribution

Question 19

When a company goes into an insolvent liquidation, how is the deductions allowance affected?

Answer 19

In an insolvent liquidation the deductions allowance is increased by the net chargeable gains in the period (or amount of cfwd cap losses if lower). This means bfwd cap losses can be offset in full in a winding-up period. Gains transferred from another group comp (or arising due to nil gain transfer from another group comp) are not incl in the net gains figure for this purpose. The increase applies from 1 Apr 2020

Question 20

What tax implications should be considered when the cessation of trade will occur at some point during the winding up process?

Answer 20

1) end of an acc period unless the liquidator has already been appointed
2) Balancing adj arise on disposal of P&M that has been attracting cap allowances

3) trading losses- would need to consider options as cfwd under s45 is no longer an option:
a) CY, then carry back 12m again total income & gains
b) group relief
c) terminal loss relief
» Losses of last 12m can be carried back 36m from start of acc period of the loss
» Losses which are cfwd to the period of cessation can then be carried back 36m from the end of the acc period of cessation

4) On disposal of the comp’s asset gains/ capital losses will arise on chargeable assets disposed of and trading profs on IFAs held as trading assets
5) Comp must deregister for VAT
6) If the comp was a close comp before the cessation of trade- it will become a close investment holding company after

Question 21

What tax implications should be considered when the cessation of trade will occur at some point during the winding up process?

Answer 21

1) end of an acc period unless the liquidator has already been appointed
2) Balancing adj arise on disposal of P&M that has been attracting cap allowances

3) trading losses- would need to consider options as cfwd under s45 is no longer an option:
a) CY, then carry back 12m again total income & gains
b) group relief
c) terminal loss relief
» Losses of last 12m can be carried back 36m from start of acc period of the loss
» Losses which are cfwd to the period of cessation can then be carried back 36m from the end of the acc period of cessation

4) On disposal of the comp’s asset gains/ capital losses will arise on chargeable assets disposed of and trading profs on IFAs held as trading assets
5) Comp must deregister for VAT
6) If the comp was a close comp before the cessation of trade- it will become a close investment holding company after

Question 22

What is a solvent liquidation?

Answer 22

A voluntary liquidation

Question 23

What tax planning can be used during a solvent liquidation?

Answer 23

• Sell assets so as to maximise the use of losses

- Make distributions to SH in the most tax efficient way

Question 24

How can you plan to sell assets during a voluntary insolvency to make is as tax efficient as possible?

Answer 24

If making current year trading losses, can offset against total income and gains - so sell assets now

But if have bfwd trading losses, it’s possible to claim against current period total profits (unlikely) or carry back under TL relief (note: can only carry forward against total profits if the trade has not ceased or isn’t become small or negligible in the loss making period. Otherwise, cfwd is only against trading profits of the same trade- which are likely to be negligible (if any))

Question 25

What does the distribution to shareholders in liquidation depend on?

Answer 25

Depends on the timing about how it'll be taxed: 
- Pre-appointment of liquidator: 
>> Treated as div 
>> May be covered by div nil rate band 
>> if not, taxed at 7.5%/32.5%/ 38.1% 

• Post-appointment of liquidator
  » Treated as capital distribution
  » Calculate a gain where proceeds = distribution

Question 26

What would an individual shareholders preference be about whether the distribution to SH during liquidation process was classed as a dividend or capital distribution?

Answer 26

Dividend is preferred if BRTP or covered by div nil rate band

Capital preferred if they have capital losses, as business asset disposal relief may be available, AEA, CGT @ 10%/20%

Question 27

What would a corporate shareholders preference be about whether the distribution to SH during liquidation process was classed as a dividend or capital distribution?

Answer 27

Dividend = tax free

Capital = if SSE conditions are met then exempt

Question 28

What does it mean if a company is ‘struck off’?

Answer 28

Alternative to having a formal and expensive liquidation

Question 29

What is the time limit for striking a company off?

Answer 29

Can’t be done until 3m after the cessation of trade

Question 30

How are the distributions treated during a strike off?

Answer 30

• No liquidator is appointed, which means, in theory, there is never an app for distributions to be taxed as ‘capital’
• However, where the combined amount paid to SH is < £25k, the SH can elect to treat amount received as capital rather than income (distributions over £25k are taxed in their entirety as income)
• Note that distributions of undistributable reserves (share cap and share premium) aren’t permitted unless the company is undergoing a formal liquidation

Question 31

Give some examples of undistributable reserves

Answer 31

Share capital

Share premium

Question 32

When can undistributable shares be distributed?

Answer 32

Only if the company is undergoing a formal liquidation