Change in shareholding after liquidator is appointed

[northernladuk]

I am trying to see if my spouse can transfer his shares to me leaving 90% with me and 10% with him. This way he would pay tax only on 10% part and I would pay 10% ER tax on the 90% part. The reason of shares transfer is tax saving only. My partner did not contribute in the earnings of the business and it was me who was getting all the earnings in the business.

How on earth can that level of blatant avoidance pass any scrutiny. HRMC will be all over that like rash.

You wanted the tax benefits of your set up prior to liquidation and now you want to change it to get the tax benefits after? You can't have it both ways. You were quite happy to give plenty of the company money to your partner all the time it was you getting all the earnings and business.

Stuff like this shouldn't be allowed (and it isn't) to happen.

[Paralytic]

Thanks Maslins.
The reason I need to do this is because my spouse was not an employee of the company when we liquidated it. I did not realise that my spouse would be liable for CGT and not 10% tax relief. Now my partner needs to pay 40K tax instead of 20K that I was hoping.

I am trying to see if my spouse can transfer his shares to me leaving 90% with me and 10% with him. This way he would pay tax only on 10% part and I would pay 10% ER tax on the 90% part. The reason of shares transfer is tax saving only. My partner did not contribute in the earnings of the business and it was me who was getting all the earnings in the business.

My liquidator is happy to redistribute the funds once accountant does the share transfer and it reflects in Companies House but both of them have now asked that I should take tax advise before I decide as they do not want to take any responsibility of the work but happy to do it if I want.

Thanks

(my highlighting above)

If that isn't changing shareholding purely to avoid paying tax, then nothing is. To play this out to the extreme? Why 90% and 10% - why not just go 99% and 1%, or even just transfer all shares over? As Maslins has pointed out, have you (or you accountant) considered any potential tax implications at the point of share transfer?

It's fine your accountant and liquidator saying they they are happy to do what is necessary from their respective sides, but are they willing to indemnify you against any fallout of an HMRC investigation? You already know the answer to that is no.

If you did go ahead, I suspect the risk of HMRC ever looking into it are extremely low, but if they did, you'd be on the wrong side of the issues NLUK has raised above (aggressive avoidance).

I guess it comes down to your appetite to risk.

[Emily44]

It's not something we've ever done. My gut feeling is it's a bad idea. However, trying to think it through...

From a "can it legally be done" perspective:
- the liquidator effectively takes over the role of directors (controlling the company), but not of shareholders (beneficial owners of company).
- I don't see why the company being under different control would prevent the beneficial owners changing (ie people buying/selling shares).
- whilst I jointly run a company that does lots of solvent liquidations, I am NOT a qualified licensed insolvency practitioner. We only do simple cases, and I don't have either the technical/theoretical knowledge from exams, or the practical experience from doing lots of quirky cases.

From a "does it make sense for tax" perspective:
- is there any commercial (ie not tax saving) reason at all for this transfer?
- shares can't just be gifted, without tax consequences based on their value.
- often in contractor companies, it can be argued the real value is very low. Yes the company may be regularly profitable, but this is typically on the basis of physical work efforts by a key individual. Remove the work efforts of that individual, the income disappears completely, hence no transferable value beyond the company's net asset value.
- if your company's undergoing an MVL, I'm anticipating the trading has already stopped, but there is a high net asset value. Therefore you likely would need to consider the transfer value, as person X transferring shares in the company to person Y is transferring a significant amount of value.
- consider entitlement to BADR. I don't know what you're trying to achieve, but if it's perhaps give a shareholding to someone to enable them to use their annual exemption, ensure that (even ignoring the above possible issues) you don't lose out more on BADR if they won't qualify for it, than you gain from the annual exemption.

Overall, without further transfer I imagine you're looking at 10% personal tax, which is pretty low. Doing something convoluted that hasn't been fully thought through in the hope of saving a few pounds could potentially backfire heavily. I wouldn't want any of our clients to risk it unless we were 99% confident in the position, and the amount to be saved was significant.

Possibly your accountant is extremely savvy on these things, has considered it all carefully, and is confident it's a winner. Possibly they're just a bit of a numpty that hasn't considered the multiple possible problems. Are they as a bare minimum a fully qualified accountant (ACCA/ACA/CA), ideally also a chartered tax adviser (CTA)? If so, they probably can be trusted to advise well on this. If not, do remember literally anyone can legally call themselves an accountant and start dishing out "advice", even if they have no clue what they're talking about, have done no exams/have no experience. Might be worth checking their PII, and get their advice clearly in writing, so if it goes horribly wrong you've some decent recourse options.

Thanks Maslins.
The reason I need to do this is because my spouse was not an employee of the company when we liquidated it. I did not realise that my spouse would be liable for CGT and not 10% tax relief. Now my partner needs to pay 40K tax instead of 20K that I was hoping.

I am trying to see if my spouse can transfer his shares to me leaving 90% with me and 10% with him. This way he would pay tax only on 10% part and I would pay 10% ER tax on the 90% part. The reason of shares transfer is tax saving only. My partner did not contribute in the earnings of the business and it was me who was getting all the earnings in the business.

My liquidator is happy to redistribute the funds once accountant does the share transfer and it reflects in Companies House but both of them have now asked that I should take tax advise before I decide as they do not want to take any responsibility of the work but happy to do it if I want.

Thanks

[northernladuk]

Might be worth checking their PII, and get their advice clearly in writing, so if it goes horribly wrong you've some decent recourse options.

If you are getting to the stage when you have to check the accountants PII before you make a decision I (personally) would argue you really shouldn't be doing it. If it's that close to the line that suing your accountant is the only recourse should the worst happen then it's got to be a bad idea. Just to save a bit of tax?

Great response as always from Maslin's with a good description of pros and cons. Even that said I cannot believe for one minute changing shareholdings to aggressively evade tax in this was is a good idea. Again, any accountant would advise against too many changes to shareholdings in normal business so I cannot see how they would agree to this blatant avoidance. It's just wrong on so many levels. This is just my gut feeling with my approach to risk being applied so obviously Maslins approach is different but this is certainly not somewhere I'd be going.

[Maslins]

It's not something we've ever done. My gut feeling is it's a bad idea. However, trying to think it through...

From a "can it legally be done" perspective:
- the liquidator effectively takes over the role of directors (controlling the company), but not of shareholders (beneficial owners of company).
- I don't see why the company being under different control would prevent the beneficial owners changing (ie people buying/selling shares).
- whilst I jointly run a company that does lots of solvent liquidations, I am NOT a qualified licensed insolvency practitioner. We only do simple cases, and I don't have either the technical/theoretical knowledge from exams, or the practical experience from doing lots of quirky cases.

From a "does it make sense for tax" perspective:
- is there any commercial (ie not tax saving) reason at all for this transfer?
- shares can't just be gifted, without tax consequences based on their value.
- often in contractor companies, it can be argued the real value is very low. Yes the company may be regularly profitable, but this is typically on the basis of physical work efforts by a key individual. Remove the work efforts of that individual, the income disappears completely, hence no transferable value beyond the company's net asset value.
- if your company's undergoing an MVL, I'm anticipating the trading has already stopped, but there is a high net asset value. Therefore you likely would need to consider the transfer value, as person X transferring shares in the company to person Y is transferring a significant amount of value.
- consider entitlement to BADR. I don't know what you're trying to achieve, but if it's perhaps give a shareholding to someone to enable them to use their annual exemption, ensure that (even ignoring the above possible issues) you don't lose out more on BADR if they won't qualify for it, than you gain from the annual exemption.

Overall, without further transfer I imagine you're looking at 10% personal tax, which is pretty low. Doing something convoluted that hasn't been fully thought through in the hope of saving a few pounds could potentially backfire heavily. I wouldn't want any of our clients to risk it unless we were 99% confident in the position, and the amount to be saved was significant.

Possibly your accountant is extremely savvy on these things, has considered it all carefully, and is confident it's a winner. Possibly they're just a bit of a numpty that hasn't considered the multiple possible problems. Are they as a bare minimum a fully qualified accountant (ACCA/ACA/CA), ideally also a chartered tax adviser (CTA)? If so, they probably can be trusted to advise well on this. If not, do remember literally anyone can legally call themselves an accountant and start dishing out "advice", even if they have no clue what they're talking about, have done no exams/have no experience. Might be worth checking their PII, and get their advice clearly in writing, so if it goes horribly wrong you've some decent recourse options.

[jamesbrown]

Maslins

[eek]

I am asking here as i am not convinced to do it. I am trying to find out if someone has done this and if can share the experience.

At which point you are again asking the wrong people as most contractors having MVLed rarely return here and your question is something that only a small minority of companies need to do. So I doubt anyone here can answer your question.

you require specialist advice so find an independent tax specialist or MVL expert and ask them.

[Emily44]

If both your former accountant and the liquidator have told you you can do it why on earth are you asking a bunch of strangers online in a forum that has little to do with accountants or liquidators?

I am asking here as i am not convinced to do it. I am trying to find out if someone has done this and if can share the experience.

[northernladuk]

Tax saving is the reason. My Accountant said that they have done it with liquidators several times in past. Its not a small accountant but a big firm but I am trying to be cautious. My liquidator also agreed that they can do it.

Even if it 'can' be done it shouldn't be done for tax reasons. It's aggressive avoidance in it's purest form. We are told to think carefully about changing shareholders when the company is running to avoid scrutiny so do it at this point for absolutely no reason but to avoid tax has to be a step too far surely? Your opening sentence should read 'Tax evasion is the reason'

[eek]

Tax saving is the reason. My Accountant said that they have done it with liquidators several times in past. Its not a small accountant but a big firm but I am trying to be cautious. My liquidator also agreed that they can do it.

If both your former accountant and the liquidator have told you you can do it why on earth are you asking a bunch of strangers online in a forum that has little to do with accountants or liquidators?

[Emily44]

I can't believe that is possible for one minute. What can the business justification for a change of a company in liquidation be? It can only be to affect the distribution, I'd guess for tax reasons, and if that's not aggressive avoidance I don't know what is.

Give us a clue why you want to do it.

Tax saving is the reason. My Accountant said that they have done it with liquidators several times in past. Its not a small accountant but a big firm but I am trying to be cautious. My liquidator also agreed that they can do it.

[northernladuk]

I can't believe that is possible for one minute. What can the business justification for a change of a company in liquidation be? It can only be to affect the distribution, I'd guess for tax reasons, and if that's not aggressive avoidance I don't know what is.

Give us a clue why you want to do it.

[Paralytic]

Once a liquidator has been formally appointed, I'd think not. But what i think matters little. What does the liquidator say?

However, if both shareholders would otherwise agree, why not just redistribute after the fact? What is it you are trying to do or (most likely) avoid?

[Emily44]

Is it possible to change the shareholding of an LTD company between 2 shareholders after a liquidator is appointed and the declaration of distribution? Can the shareholding be updated and the funds redistributed? (Of course, with the mutual consent of the both shareholders). Is this possible and allowed? Anyone who has experience with this could you please share your feedback. Thanks