Sales of assets vs Sale of shares

Question 1

What are the three options

Answer 1

1) sale of shares –> CGT
2) Sale of assets then liquidate the company
3) Sale of assets then draw down on the reserves as income over a period of time

Question 2

What does a sale of shares avoid

Answer 2

Double tax implications. CT tax followed by either CGT or Income tax

Question 3

What are the steps to a sale of assets/ caculating distributable reserves

Answer 3

1)Prepare final CT computation (capital allowance/ sale of stock debtors/ chargeable assets
2) Calculate CT owed
3) Used proceeds to settle all liabilities
4) Add any cash

Question 4

Capital distribution

Answer 4

Take the distributable reserves minus the base cost of the share (tax free) then calculate CGT owed

Make sure to take the CGT owed away from the distributable reserves

Question 5

Income distribution

Answer 5

Take the distributable reserves minus the base cost of the share (tax free) then calculate income tax owed

Income tax as if drawing dividends over a period of time 8.25%

Make sure to take the IT owed away from the distributable reserves

Question 6

Three things to remeber

Answer 6

Once calculated the CT liabily for the final trading period use the proceeds to settle all liabilites (including CT of the final period)

When calculating after tax proceeds remember the base cost is tax free. After tax proceeds = distributable reserves minus CGT / IT owed.

Question 37

Question 7

Explain TARR - Phonexism

Answer 7

Target anti avoidence rule which aims at preventing phonexism.
This is where a company liquidates in order to extract accumulated profits as a capital distribution (tax as a capital gain rather than a dividend)

Question 8

What are the conditions for TARR

Answer 8

If the following apply then the distributed reserves will be taxed as income

1) Imediately before winding up the individual has at least 5% of shares and voting rights
2) The company is a close company
3) At any time within 2 years following the date of distribution the indivudal carries on a trade which is the same
4) It is reasonable to assume the main purpose of the winding up was for tax avoidence or reduction of a charge to income

Question 9

Mention (Extra)

Answer 9

Legal fees incurred in liquidating company and selling shares