3.8.2 if the Seller receives the deferred consideration in the form of QCBs then the total gain is computed by reference to the total proceeds including the amount of the QCBs. The transaction is governed by the provisions in Section 116, TCGA. The gain is computed, and is then held over. The tax on the gain is payable when the loan note is redeemed (or becomes worthless). 3.8.3 If the deferred consideration is received in the form of non QCBs issued by the Buyer then the normal rules relating to “paper for paper” transactions apply, as set out in Section 135, TCGA. This section provides that the transaction shall be treated in accordance with Sections 127 to 131, as if the Buyer and the Company were the same company and as if the exchange of the shares for the non QCBs were a reorganisation of the share capital of the Company. 3.9 ESC D52 makes provision for those situations in which there is a claim under warranties but the consideration is in the form of loan notes. This Extra Statutory Concession provides that such payments can be treated as additional consideration paid, as an increase in the base cost.
4Tax Position of the Buyer
4.1 The initial consideration, together with the related professional costs, will represent the base cost of the shares in the Company for the purposes of capital gains tax. Any proceeds that the Buyer then receives from claims under either warranties or the deed of covenant, will reduce that base cost. If the base cost is low and the ceiling on claims is in excess of this cost, then the excess is taxable on the Buyer. 4.2 Therefore, in the view of HMRC there is not the symmetry of tax treatment that an intelligent lay person might expect: amounts are potentially taxable on the Buyer despite the fact that such payments do not trigger a capital loss for the Sellers.
5Relationships Between Sellers
5.1 The first draft of the tax covenant is likely to be prepared on the basis of the Sellers all being Covenantors on a joint and several basis.
5.2 There can be circumstances when such terms are not acceptable to one or more of the Sellers, most notably when the Sellers include people acting in a trustee capacity.
5.3 In such circumstances it is very possible that special terms can be agreed, with the trustees effectively being limited to a proportionate liability. The trustees would be in danger of acting in breach of their duties if the trust funds could be liable for the obligations of other shareholders.
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