Ch.7 - Companies - special situations Flashcards
How can a company buy back its own shares?
- company must have sufficient distributable reserves
- if reserves are too low:
a) plc is not allowed to do share buyback
b) private company may as long as directors make a declaration of solvency - repurchased shares are then cancelled or company can hold them ‘in treasury’
What the is tax treatment of share buyback for corporate shareholder?
Gain is calculated as normal, although SSE may apply.
What is the tax treatment of share buyback for individual shareholder?
CAPITAL ROUTE (compulsory if conditions are met): - normal gain calculation
INCOME ROUTE (when capital route conditions are not met):
- capital part - amount equal to original subscription price of shares is treated as proceeds in gains calculation
- income part - remaining proceeds are treated as dividends
What are capital route conditions for individual when company buys back its shares?
- repurchase is in order to raise cash to pay IHT
- person selling shares must use all (or virtually all) of the proceeds to pay IHT liability
- IHT couldn’t otherwise be paid without causing hardship
- payment of tax must be within 2 years of death
or - repurchase is for the benefit of the trade (ALL following conditions must be met)
- must be unquoted company
- company must be able to demonstrate that repurchase is for benefit of the trade, not scheme to avoid tax (retired directors, dissident shareholders, beneficiaries of shareholder that died don’t want shares)
- individual must be resident in the UK and have owned shares for more than 5 years (3 years if inherited)
- must reduce their shareholding substantially
a) can hold no more than 30% of shares in the company
b) can hold no more than 75% of previous shareholding
What are tax implications of apponting an administrator for a company?
- new accounting period begins on the date of appointment
- future accounting periods end on normal year end and when the company ceases to be in administration
What are tax implications of appointing a liquidator for a company?
- liquidation becomes responsible for tax obligations of the company
- new accounting period begins on the date of appointment
- accounting period will end on the earlier of:
a) 12 months later
b) end of the winding up process - future distrobutions to shareholders will be capital
- if parent company company is put into liquidation, group relief stops (but gains group remains effective until the date of final distribution)
What are tax implications of cessation of trade?
- end of chargeable accounting period (CAP)
- balancing adjustments on P&M attracting capital allowances
- trading losses - consider CY claim, group relief claim and then terminal loss relief as cannot be cf
- capital gain/losses arise on chargeable assets
- deregistration for VAT
- if company was close company, will become close investment holding company after
What tax planning can be done when winding up the company?
Only possible if it is voluntary liquidation.
- sell assets to maximise use of losses before appointing liquidator (as new CAP start with appointment) - it is possible to carry forward losses against total profits only is trade has not ceased of became negligible, otherwise only against same trade profits)
- make distributions to shareholders in the most tax efficient way
a) pre-appointment - distributions treated as dividend (individual - prefers if BRTP or covered by nil rate band, corporate - tax free)
b) post-appointment - treated as capital distribution (individual - prefer if has losses, ER or AEA saved, corporate - prefers if SSE conditions are met)
What happens when the company is being struck off?
Rather than having a formal and expensive liquidation, company’s shareholders can apply for it to be struck off (can ONLY be done 3m after cessation of trade).
Implications:
- no liquidator is appointed, which means there is never an opportunity for distributions to be treated as capital
- where amount paid out to shareholder is less than £25k, he can elect to treat it as capital rather than income
- distributions out of undistributable reserves (share capital and premium) are not permitted unless a company is undergoing formal liquidation