SGS 3 (Tax and Consideration) Flashcards

1
Q

3 benefits to Buyer and 2 to Seller of consideration in the form of shares?

A

B: cash flow, gearing ratio lowered, no obligation to pay dividends.

S: Shares may increase in value, may receive a dividend.

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2
Q

3 disadvantages to Buyer and Seller of share consideration?

A

B: Sh approval to issue new shares, existing SHs diluted, dividend payments not tax deductible.

S: If buyer not listed shares not freely transferable, shares may decrease in value, dividend not guaranteed.

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3
Q

3 advantages for Seller and 2 for buyer in using loan notes as a form of consideration?

A

B: aids cash flow, no dilution of SHs, interest payments tax deductible.

S: receives interest payments, greater certainty that sum will be achieved compared to shares.

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4
Q

Disadvantages to Buyer and Seller of using loan notes?

A

B: interest payments, increased gearing, may need to grant security.

S: deferred consideration, risk of non-payment.

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5
Q

A’s to Buyer and Seller of using an earnout?

A

B: can set off and use future profits to finance company (eases cash flow)

S: If T successful post-completion, more value may be received, most suitable for when S stays on in company and can influence T’s success post-completion.

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6
Q

D’s of earnouts?

A

B: seller may impose controls on how business is run, S remaining in business may attempt to maximise short term profits.

S: must wait for consideration, amount uncertain.

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7
Q

When does SSE apply and what are the conditions?

A

Applies to a Corporate SELLER in a share sale only.

S OWNED of at least 10% ordinary share capital of company
o for at least 12 consecutive months
o in the 6 years prior to disposal

Co whose shares are being sold must be a trading co or the holding co of a trading group for period from the beginning of the 12 month period mentioned above until the date of sale.

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8
Q

If SSE applies, what is the effect?

A

No corporation tax payable as no deemed gain.

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9
Q

What is the form of tax deferral for share consideration?

A

Rollover relief
defers tax until Target shares sold.

Buyer must hold over 25% of the target co’s ordinary share capital

Bona fide commercial reason for structuring the payment in shares
(i.e. wanting to acquire interest in target but lacking financial resources)

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10
Q

If rollover relief has been used to defer tax, how is tax calculated when they are later sold?

A

Gain (or loss) is calculated as difference between S’ base cost in Target shares and proceeds of sale of the shares in B.

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11
Q

What is the form of tax deferral for loan notes?

A

Holdover relief (defers until loan notes redeemed)

Buyer must hold over 25% of the target co’s ordinary share capital

Bona fide commercial reason for structuring the payment in loan notes

Loan notes must not be redeemable until at least 6 months after date of issue.

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12
Q

What happens if the third condition of holdover relief is no fulfilled?

A

HMRC treats the transaction as if it had been in cash as opposed to loan notes (CGT payable),

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13
Q

What needs to be considered if an individual qualifies for ER and tax deferral?

A

Shares - if ER available at sale but S defers, S only gets ER at subsequent sale if meets all conditions for the subsequent sale i.e. meets ER conditions in relation to shares they are selling (the buyer, not an employee of the buyer), therefore preferable to elect out of tax deferral to obtain advantage of ER.

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14
Q

ER conditions?

A

Selling shares in trading co.
Officer or employee
Owned 5% ordinary voting shares
All of the above for at least 12 months prior to disposal
£10m lifetime limit – could be exceeded if has made previous claim(s)

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15
Q

What is an earnout?

A

S receives additional further consideration at regular intervals following completion based on performance of Target post completion.

Only acceptable where INDIVIDUAL S is staying on and can influence business post completion (not good for companies as unable to get SSE)

Always also consider time value of money as it is a form of deferred consideration.

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16
Q

What is a set off clause?

A

Enables buyer to deduct an amount in satisfaction of any claim under the warranties or tax covenant but ensure seller has a clause stipulating such a claim is proven or agreed in writing.
Useful in the context of loan notes or earnouts.

17
Q

When would a pre-sale dividend be a good idea alongside SSE?

A

No tax advantage but could be commercially advantageous as rescues price of Target, thereby increasing demand.

18
Q

What is the effect of a pre-sale dividend?

A

It strips value out of the company leading to lower consideration being paid by B (and therefore lower CG by Seller)

Only applies to share sales.

Good for corporate sellers as no corporation tax arises from declaration of dividends.

19
Q

What are the alternatives for a purchase price based on an NAV?

A

wait for completion accounts to be prepared to reflect NAV on day of completion but provide cap so adjustment can never be beyond a certain figure in a given direction.

Locked box - valuation based on recent audited balance sheet (no adjustment)

20
Q

Question structure?

A

Share or asset sale?

Who is seller?

individual or company?

Type of tax will Seller pay?

Reliefs / exemptions?

21
Q

What potential exemptions are available to seller for cash consideration?

A

I: CGT payable, so ER.

C: Corporation tax payable, so SSE.

22
Q

What potential exemptions are available to seller for share consideration?

A

I: CGT payable, ER or rollover relief.

C: Corp tax payable, so SSE or rollover.

23
Q

What potential exemptions are available to seller for sloan note consideration?

A

I: CGT payable, so ER or Holdover.

C: Corp tax payable so SSE or rollover.

24
Q

What is a Class 1 transaction?

A

Applies if buyer is a public ‘listed’ company.
Size of transaction classified according to number of ratios (gross assets, profits, consideration, gross capital)

If any % ratio is 25%+ but less than 100%, notify RIS, explanatory circular approved by FCA and sent to shareholders, SH approval.

25
Q

Why might a Buyer be concerned about a Class 1 transaction?

A

timetable delayed as need time to prepare and get FCA approval of circular.

Split exchange and completion to convene GM (SH consent will be a CP).

26
Q

What is a class 2 transaction?

Anything else to consider for a listed company?

A

If any % ratio 5% or more but less than 25%, notify RIS.

Related party transaction? If so, notify RIS, circular, SH approval (but note that RP does not vote at GM).

27
Q

SDLT?

A

Market value over £150,000.