Capital Gains - Question on "rollover equity shares"
Discussion
If one sells a company and the deal is structured such that 80% of the price is paid to the owners in cash but 20% of the agreed price becomes equity in the new company (under new ownership) in the form of shares, is the 20% subject to CGT? I can answer any questions if that's at all ambiguous. 
Generally speaking, rollover relief is for qualifying business assets not for entire businesses or shares in a business. Qualifying assets are usually land and buildings used in a business, fixed plant and machinery and/or goodwill.
The relevant relief in your situation may be Entrepreneur's Relief. CGT at 10% on disposals up to a cumulative lifetime limit of £1M, subject to conditions which include a director holding at least 5% of the ordinary shares of a genuine trading company.
People selling companies usually have an accountant to advise on this sort of thing.
The relevant relief in your situation may be Entrepreneur's Relief. CGT at 10% on disposals up to a cumulative lifetime limit of £1M, subject to conditions which include a director holding at least 5% of the ordinary shares of a genuine trading company.
People selling companies usually have an accountant to advise on this sort of thing.
RichB said:
If one sells a company and the deal is structured such that 80% of the price is paid to the owners in cash but 20% of the agreed price becomes equity in the new company (under new ownership) in the form of shares, is the 20% subject to CGT? I can answer any questions if that's at all ambiguous.
I’m not an accountant (so please ignore anything I say and ask an accountant). I agree with Rockin, ER would be your route if you haven’t used you allowance by now. It used to be £10m but was reduced to £1m recently. If you are taking a portion in cash (80%) and this is less than your £1m ER allowance, then you might be able to have a ‘stand in your shoes’ agreement and pay tax at the 10% ER level on the remaining amount up to £1m - thereafter, depending on how it was structured, you would pay the higher rate of 20%cgt. Downsides of using ‘stand in your shoes’ is that you can pay a bit more tax up front - upside is that it reduces your tax overall and also hedges against any changes to the CGT changes - wouldn’t be too much of a stretch to think that cgt will rise to pay for Covid.
Obviously the devil is in the detail and what has worked for me previously may not work in your instance. Just remember there are two types of accountant... ones that mechanically do your returns and ones that truly understand tax law.
The first are a lot cheaper but will cost you lots of money. The big 4 obviously understand this inside out, however, you’ll pay heavily for the pleasure and it depends how big the transaction is as to whether they would be value for money - no point saving £1,000 tax and ending up with a £50k bill from the accountant.
Congratulations btw
Last time I did this in 2014, I cashed out 75% and rolled 25%. We used PWC for tax planning and there was an option to pay 10% CGT on the rolled equity at the time, but I figured a bird in the hand....
The 25% cash went in to the new business as loan notes with a 12% rolled up coupon, and also provided equivalent ordinary stock. I just checked out with another transaction in June. 20% capital gains on the equity & the loan note principle, income & dividend tax on the loan note interest. The capital gains rules circumvented all the tax planing we had done. Deal costs were an allowable expense against the CGT gain.
The 25% cash went in to the new business as loan notes with a 12% rolled up coupon, and also provided equivalent ordinary stock. I just checked out with another transaction in June. 20% capital gains on the equity & the loan note principle, income & dividend tax on the loan note interest. The capital gains rules circumvented all the tax planing we had done. Deal costs were an allowable expense against the CGT gain.
rockin said:
Generally speaking, rollover relief is for qualifying business assets not for entire businesses or shares in a business..
Indeed, I read about that on the Gov.UK website and that was my understanding but the Americans buying the company call the shares we will receive in 'Newco' rollover equity shares. I didn't know if this was a common M&A expression. You're now describing a somewhat different situation from your original post, which sounded like a small private company.
It now sounds like a typical "paper and cash" offer for a large company. Suggest reading the information on this link which essentially says there's no CGT payable on "new shares" that you retain. https://www.gov.uk/guidance/capital-gains-tax-shar...
Usually there will be an arrangements set up so that those who wish to sell their new shares can do so, and they will be subject to CGT accordingly.
It now sounds like a typical "paper and cash" offer for a large company. Suggest reading the information on this link which essentially says there's no CGT payable on "new shares" that you retain. https://www.gov.uk/guidance/capital-gains-tax-shar...
Usually there will be an arrangements set up so that those who wish to sell their new shares can do so, and they will be subject to CGT accordingly.
rockin said:
You're now describing a somewhat different situation from your original post, which sounded like a small private company.
Thanks that's helpful. I didn't give full details but as you guessed it's an US firm buying our company which is, indeed a private company - guess it depends on what you think of as small. 
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