6 Tax Covenants in Respect of Stamp Duty
6.1 There is a concern that Section 117, Stamp Act 1891 may invalidate any covenants given in respect of stamp duty. This section provides that any contract, arrangement or undertaking for assuming any liability in respect of stamp duty, or any indemnity against such liability shall be void. 6.2 There is therefore a growing trend for tax covenants to require that any documents which require stamping in order to prove title are stamped by the Covenantors. This is achieved by including a warranty that all such documents are stamped. The tax covenant then goes on to state that the Covenantors shall procure the stamping of any documents if such warranty is not true. 6.3 As an alternative to the above, it is possible to give a warranty to the effect that all such documents are stamped and to state that the measure of loss for the breach of this warranty is the amount of the stamp duty in question.
7 The Tax Position of the Sellers
7.1 The sale of shares by individual Sellers will be subject to capital gains tax: the tax will normally be computed by reference to the net proceeds, with the original base cost of the shares being deducted in order to compute the gain. This is subject to the treatment of consideration in the form of loan notes, which is dealt with below.
7.2 The same basic rules apply to a corporate Seller, apart from two material variations:
7.2.1 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, then SSE should apply, if the shares have been held for at least 12 months and the shareholding in question is at least 10%;
7.2.2 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.
7.3 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. 7.4 The way that Section 49 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 the tax covenant. (HMRC have
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