(i) Sale of 2,700 shares back to Granada Ltd
For capital gains tax treatment to apply, Maria’s shareholding in Granada Ltd must be reduced to no more than 75% of her pre-sale holding.
Maria has a 25% shareholding before the sale. Therefore, after the sale her shareholding must be reduced to no more than 18·75% (75% x 25%).
The total number of shares in issue after the sale will be reduced as the shares repurchased by the company are cancelled.
Maria will hold 7,300 (10,000 – 2,700) shares out of 37,300 ((10,000 x 4) – 2,700) total shares in issue. This is a 19·6% (7,300/37,300 x 100%) holding, i.e. greater than 18·75%, so that the condition relating to the reduction in the level of shareholding will not be met.
Sale of 3,200 shares back to Granada Ltd
Maria will now hold 6,800 (10,000 – 3,200) shares out of 36,800 (40,000 – 3,200) total shares in issue. This is an 18·5% (6,800/36,800 x 100%) holding, i.e. less than 18·75%, so that the condition relating to the reduction in the level of shareholding will be met.
(ii) Sale of 2,700 shares back to Granada Ltd
The income tax payable in respect of each share is £2·95 ((£12·80 – £1·00) x 25%).
The post-tax proceeds per share are therefore £9·85 (£12·80 – £2·95).
Tutorial notes:​​​​​​​
1. As Maria does not satisfy all of the conditions for this sale to be dealt with under the capital gains tax rules, the disposal will be treated as an income distribution and Maria will have an income tax liability.
2. The net dividend is the difference between the sale proceeds and the amount originally subscribed.
3. As Maria is a higher rate taxpayer, the effective rate of tax payable on dividends is 25% ((32·5 – 10)%/0·9).
Sale of 3,200 shares back to Granada Ltd​​​​​​​
The capital gains tax payable in respect of each share is £1·18 ((£12·80 – £1·00) x 10%).
The post-tax proceeds per share are therefore £11·62 (£12·80 – £1·18).
Tutorial note: The disposal will qualify for entrepreneurs’ relief as Maria holds more than 5% of the ordinary shares of Granada Ltd and is a director of the company. The capital gain arising will therefore be taxed at 10%.​​​​​​​

(i) Acquisition of the ‘Starling’ brand
As the brand is an intangible asset which has been acquired as part of the ‘Starling’ trade, it will be treated as a trading asset by Granada Ltd and an allowable deduction will be available in calculating the taxable trading income for each accounting period.
Although Granada Ltd has not made any charge for amortisation in its statement of profit or loss, it may take an annual writing down allowance for tax purposes equal to 4% of the cost of the brand, on a straight line basis. This would be £1,600 (£40,000 x 4%) per year.
If an election is made to claim the 4% writing down allowance, any accounting debits for impairment would be disallowable for tax purposes. Such an election would be irrevocable.
(ii) Relief for the expected loss from the former Starling Partners’ trade
As Starling Partners is an unincorporated business, Granada Ltd took over ownership of the assets and responsibility for the trade following its acquisition on 1 January 2016.
The forecast trading loss of £130,000 from Starling Partners’ handbag trade could be offset against Granada Ltd’s total income for the year ending 31 December 2016, comprising the trading profit from the knitwear business of £100,000 and the chargeable gain of £10,000.
So a loss of £20,000 (£130,000 – £110,000) will be left unrelieved.
As Granada Ltd does not want to carry any of the loss back, the unrelieved loss of £20,000 must be carried forward for relief against the first available future profits from the same trade. This will exclude any future profits from Granada Ltd’s knitwear manufacturing business.
Granada Ltd wishes to change the nature of the Starling Partners’ trade, by starting to sell to the export market from 1 January 2017. Although this may be seen as a major change in the nature of the trade, it should not serve to prevent the loss incurred in the year ended 31 December 2016 from being carried forward providing HM Revenue and Customs (HMRC) agree that, essentially, the same trade is being carried on. The impact of a major change in the nature or conduct of a trade in restricting loss relief is only relevant where it precedes or follows a change in ownership of a company, not the acquisition of the trade and assets from an unincorporated business.
Accordingly, based on the expected profit, £15,000 of the carried forward loss may be relieved in the year ending 31 December 2017, and the remaining £5,000 will be carried forward for relief in future years.

Value added tax (VAT) implications following the acquisition of the trade and assets of Starling Partners
For VAT purposes, the transfer of Starling Partners’ trade and assets qualified as a transfer of a going concern (TOGC). Therefore no VAT will have been charged on the transfer of the assets generally, and so there will have been no input VAT for Granada Ltd to reclaim.
However, additional information is needed in respect of the building, as its treatment will depend on its age and whether or not the option to tax has been exercised.
Age of the building: If the building was less than three years old at 1 January 2016, its sale would have been a taxable supply, chargeable to VAT at the standard rate.
Option to tax: If the building was more than three years old, its sale would have been exempt from VAT, unless Starling Partners exercised the option to tax.
If the building was less than three years old or Starling Partners had opted to tax the building, then the transfer would have been a taxable supply, chargeable to VAT at the standard rate. In either case, to bring the transfer of the building within the TOGC regime, so that no VAT is charged, Granada Ltd must also have opted to tax the building, prior to the date of transfer. Alternatively, if Granada Ltd did not opt to tax the building, but uses the building in its business, it may obtain an input credit for the VAT charged.