When selling your business, the structure of the transaction matters enormously and should always be the subject of professional advice. In a case on point, two women who sold their company for a seven-figure sum ended up with Capital Gains Tax (CGT) demands that they viewed as deeply unfair.
The sale and purchase agreement by which the women disposed of their equal shareholdings in the company stated that the purchase price was £8 million. The company, however, owed a bank debt of about £1.1 million which was discharged by the purchaser before the balance was paid on to the women. They took the view that they should pay CGT only on the £6.9 million they actually received. However, HM Revenue and Customs decided that the whole of the £8 million was subject to CGT.
Challenging that decision, the women argued that the £8 million was a payment for the sale of the shares and, separately, the discharge of the bank debt. They pointed out that the debt was paid off directly from the purchaser’s account and that the £1.1 million never passed through their hands. They contended that it was extremely unfair to require them to pay CGT on a sum much greater than that which they personally received for their shares.
Dismissing their appeal, however, the First-tier Tribunal noted that the agreement only alluded to the bank debt in oblique terms, making no mention of how it should be paid off. It made no apportionment between payment for the shares and discharge of the debt. The agreement stated unambiguously that the purchase price of the shares was £8 million and the women had failed to establish that it did not accurately reflect the intentions of the parties.