3.2.1 it is possible that there is no tax charge on a corporate Seller due to the operations of the Substantial Shareholding Exemption (“SSE”). In broad terms if the Company is a trading company and the Seller is a trading company or a trading group before and after the sale, with a holding of at least 10% of the shares, then SSE should apply, if the shares have been held for at least 12 months;
3.2.2 if SSE does not apply, the selling company will still be entitled to an indexation allowance in respect of the base costs of its shares in the Company.
3.3 If the Seller makes a payment under the warranties or the tax covenant, the consideration that he receives is reduced under the provisions of Section 49, TCGA, assuming that he has received cash proceeds rather than loan notes. 3.4 The way that Section 49, TCGA works is that no allowance is given initially in respect of “...any contingent liability in respect of a warranty or representation made on a disposal by way of sale or lease of any property other than land.” Section 49(2) then reads as follows: “If any such contingent liability subsequently becomes enforceable and is being or has been enforced, there shall be made, on a claim being made to that effect, such adjustment, whether by way of discharge or repayment of tax or otherwise, as is required in consequence.” Therefore the original capital gains tax computation is revisited and recomputed, having regard to the fact that the Consideration has now been reduced by payments in respect of warranties or under the tax covenant. (HMRC have confirmed that they consider that payments under tax covenants will be considered in the same way as warranties and representations.) 3.5 If the ceiling on claims is greater than the consideration received, then it is the view of HMRC that the Seller does not crystallise a capital loss. It is their view that adjustments under Section 49 can only take the consideration down to £nil and that consideration cannot be a negative figure. 3.6 This can be a potential issue in those cases where the Consideration is nominal, due to ongoing trading losses being incurred or due to the balance sheet of the Company having net liabilities. In such situations the Buyer may seek protection under the warranties and indemnities of a figure which is considerably in excess of the Consideration paid. 3.7 It is very common for Sellers to receive part of the Consideration for the shares in the form of loan notes. Such loan notes can be either qualifying corporate bonds (“QCBs”) or nonqualifying corporate bonds. This is especially the case where part of the Consideration is deferred at the instigation of the Buyer.
3.8 There are three possible tax treatments for deferred consideration, depending on the structures that are adopted:
3.8.1 if the consideration is due under the contract, and is deferred consideration, then it is taxable at the point of exchange of unconditional contracts for sale: the fact that part of the Consideration is to be paid some time after Completion has no impact on the point when the tax crystallises;
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