Conflicting tax advice re share transfer

P

paddy

Guest
Hi,

I am in a 50% shareholder in a company in which there is one other 50% shareholder. The other shareholder is leaving and transferring 49 of the 100 issued ordinary shares to me and 1 to another person at nominal value of €1 per share. The company has carried forward losses. I have been advised by my tax advisor that because of the carried forward losses, the shareholder disposing of the shares will be liable to CGT on their portion of the losses, i.e. 50%.

This sounded odd to me as there does not appear to be any "Gain" here. So I checked with another tax advisor who says this is not the case. Just wondered if anyone on here had any thoughts to add, suppose best bet is to contact Revenue for clarification. Thanks.
 

OK. Where to start..!

  • Shares are assets that are chargeable to CGT if there is a gain on disposal.
  • I presume that this guy paid the nominal €50 for the shares.
  • His transfer of the shares to you as the other proprietary director would be a disposal to a connected person, so the shares would be deemed to pass at their market value.
  • If this market value exceeds €50 then there will be a gain, which would be liable to CGT.
  • The market value can be derived by a number of methods, but the most common would be the net asset value of the company (the value of all the company assets less all liabilities).

So, while the company may have losses carrying forward, the company's balance sheet (and hence the shares), may well have value, and this could give rise to a CGT liability on your co-director when he disposes of them...

Maybe the reason you've got two different opinions is that your own tax advisor knows that the losses have wiped out any value on the balance sheet, and this is what he meant when he told you what he did.

Whereas the second advisor may not actually be familiar with the financial position of the company, and if you put it to him the way you phrased it above, I can understand why you got the answer you did...

Hope that helps
 

Thanks for the help mandelbrot. Thing is, the Net assets of the company are actually negative. The annual return was completed and signed off by the same person as gave the original advice re the CGT liability. I just can't see how there can be any liability where there is no gain anywhere in this.
 
paddy said:
I have been advised by my tax advisor that because of the carried forward losses, the shareholder disposing of the shares will be liable to CGT on their portion of the losses, i.e. 50%.
Click to expand...

Are you sure they said this? I don't understand how anyone could be liable to CGT on 'their portion of a loss'.

Make sure that any advice you get on this issue is expressed in clear and concise terms, and that the person giving the advice is fully aware of the circumstances of the case.
 

I have paraphrased above but was told that the fact that the other shareholder is getting out of a company carrying aggregated losses without having to pay their portion of the loss is considered a gain for tax purposes.
 
mandlebrot

What an excellent post!

A great summary of the issue and an explanation of the potential conflict of advice.

paddy

You should get the original advisor to set out his advice in writing.

Then you give that to guy who is giving you the second opinion.

This is a complicated area, and it's possible that stuff will get lost in translation.

Brendan
 
As mandlebrot says the company has to be valued the fact that it has accumulated losses does not equate to value.

I presume you feel that you can return the company to profit after the departure of the other shareholder with the assets and contact built up ie goodwill. So I presume you would say that the value of the company at a minimum is NIL. So you are taking over his share for market value.

On the actual point I do not think that if he paid €50 for his shares and they are valued at -€10,000 he can be subject to CGT. Perhaps the question is should he be subject to Capital Acquisition Tax on the effect gift of €10,000 from you?
 
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What does the balance sheet of this company look like if it has accumulated losses?

How were those losses financed?

A company with accumulated losses but financed by share capital, would have a real value as the losses could be used to reduce future tax liabilities.
 
This thread has really taken off since last night!

I think what some posters are forgetting is that the owners of shares in a limited company have limited liability.
So if the guy paid €50 for his shares then the most he can lose on these shares is €50.
So this discussion of a shareholder being in some way liable for the accumulated losses of the company is a nonsense, as he is insulated from these losses by limited liability.
The only way the guy could be liable for the losses of the company, would be if he were held personally liable by the courts (i.e. the corporate veil was lifted) - HOWEVER this would be him being found liable as a Director, not as a shareholder. He could own 0 shares and still be found liable, as director, if there was reckless / fraudulent trading.

So, to sum it up:

  • If the company isn't generating profits, and has a negative net asset value (at market values rather than book values), then the shares are worth Nil.
  • Therefore the guy makes a CGT loss of €50 on his transfer of the shares.
  • The losses inside the company are irrelevant in this context.
As a result of the above, what the first tax advisor is saying, about the guy being liable for CGT on getting off the hook for his share of the losses, is also irrelevant - as shareholder he was never on the hook for these losses.
 
Brendan Burgess said:
A company with accumulated losses but financed by share capital, would have a real value as the losses could be used to reduce future tax liabilities.
Click to expand...

It would, but only to a party acquiring at least 75% of the share capital, and who was intending to continue the trade. So it wouldn't really feature in determining the open market selling price of a 50% shareholding.

(http://www.taxworld.ie/taxes/ct/current/summary)
Group relief
You may surrender an unused trading loss to a company within the same 75% group (s 420).
If you begin to carry on a trade previously carried on by another company, and you own not less than 75% of that company’s trade, you may claim the predecessor’s unrelieved losses (s 400), but “loss-buying”, i.e., acquiring the accumulated losses of a near dormant business, is disallowed (s 401).
 
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