Capital Gains Tax Loss Relief On Convertible Loan Notes

Capital Gains Tax (CGT) Loss Relief On Convertible Loan Notes

If your convertible loan note is capable of being characterised as ‘marketable’ and capable of commanding a ‘market price’ over and above the mere value of the loan, it may be possible to claim the debt as a loss for capital gains tax purposes.

Simple debt is not an allowable Loss for Capital Gains Tax Purposes

A loss made on a simple (usually undocumented) loan is not allowable as a gain or loss for capital gains tax purposes (see section 541 (1) (a) of the Taxes Consolidation Act 1997). This is because a simple loan is not considered as capable of appreciating in value for capital gains tax purposes.

However, if the loan is characterised as a ‘debt on a security’ an allowable loss for capital gains tax purposes will be created (see section 541 (1) (b) of the Taxes Consolidation Act 1997). The reason for the foregoing is because a ‘debt on a security’ is considered as a marketable asset, capable of appreciating in value.

What is a ‘debt on a security’?

Section 541 (1)(b) does not define ‘debt’ (and so it has its ordinary meaning) but defines ‘security’ as per section 585 of the TCA ’97 which includes loan stock.

Revenue have clarified in Guidelines on section 541 (par.13.3.) that the reference to loan stock should be regarded as meaning a general class of debt transferable by purchase and sale. The emphasis on ‘transferable’ is in line with the concept of a marketable capital asset capable of appreciating in value. As you will see below, this is the characteristic necessary to classify a convertible loan note as a ‘debt on a security’ pursuant to section 541 (1)(b) of the TCA ’97.

Is a convertible loan note automatically characterised as a ‘debt on a security’?

A convertible loan note is not automatically characterised as a ‘debt on a security’ for the purposes of section 541 (1)(b) of the Taxes Consolidation Act. They key test to apply is whether the loan note possessed the necessary characteristic of ‘marketability’ which would render the holder capable of selling same on the open market (see judgment delivered by Judge Francis Murphy in the Supreme Court case Inspector of Taxes v Keleghan [2001] IESC 43) and receiving an amount over and above the mere value of the loan (also known as making a ‘capital gain’ on a disposal of the asset) (see High Court judgment of Morris J in Mooney v McSweeney 1997 1 ILRM 42).

In the Irish High Court case of Mooney v McSweeney 1997 1 ILRM 429 the claimant was entitled to claim loss relief in respect of the convertible loan advanced in 1985 of £140,000. However in the Supreme Court case of Inspector of Taxes Taxes v Keleghan [2001] IESC 43, the claimant was not permitted to claim loss relief in respect of a convertible loan note which bore different characteristics to that in the first case mentioned – specifically there were restrictions on the right of conversion and no evidence was adduced to suggest that the holder could command a higher value than the funds deemed advanced originally.

It is common for shareholders of privately held companies, and their friends and family members to provide working capital finance to their company by way of a loan. In most cases the loan is provided on an informal basis with little or no supporting documentation. Where the debt cannot be repaid, the shareholder, friend or family member cannot claim capital gains tax loss relief.

Arising from the above we would advise that specific legal advice and assistance would be received before advancing funds to a company.

Whilst every effort has been made to ensure the accuracy of the information contained in this article, it has been provided for information purposes only and is not intended to constitute legal advice. Amorys Solicitors is a boutique commercial and private client law firm in Sandyford, Dublin 18, Ireland.
For further information and advice in relation to “Capital Gains Tax Loss Relief On Convertible Loan Notes”, please contact Deirdre Farrell, partner, Amorys Solicitors deirdre@amoryssolicitors.com, telephone 01 213 5940 or your usual contact at Amorys.

Dealing With Tenant Inability To Pay Rent In Commercial Leases During COVID-19

Dealing With Tenant Inability To Pay Rent In Commercial Leases During COVID-19

As business activity has reduced and cash-flow stopped in many sectors as a result of the COVID-19 restrictions, tenant inability to pay rent is an inevitability. In order to survive the economic impact, Landlords and Tenants alike will be eager to work through this time in a way that protects their investments and businesses and without resorting to potentially expensive litigation with no realistic prospect of achieving the desired result. Open communication between both parties at an early stage is critical and it is important that all concessions, variations of lease agreements and guarantees are documented in writing.

This article explores practical ways of dealing with tenant inability to pay rent in commercial leases as a result of the adverse impact of COVID-19 restrictions.

  1. Concession by way of a Side Letter

Usually, concession arrangements are documented by way of a 1-2 page side-letter so they are quick to put in place and consequently offer immediate relief. Depending on an arrangement with its funder/s, a Landlord could be in a position to offer a commercial tenant a ‘rent-free’ or ‘rent suspension’ period during say Q2 (1 April to 30 June) or Q3 (1 July to 30 September) of 2020 by way of a side letter.

Any agreement reached regarding the responsibility to pay rent must be clear. A ‘rent free’ period is very different to a ‘rent suspension’ period. The latter infers that rent will be payable at some point in the future and interest on late payment may apply – which should be documented in the side-letter. Landlords could also consider moving from quarterly to monthly rent payments. Whilst the rent for occupying the premises could be suspended or written off by the Landlord entirely (subject to its funder’s requirements), it is strongly recommended that a tenant’s obligation to pay insurance, rates and service charges remain in place to ensure the Landlord’s valuable asset is maintained in accordance with good estate management practice. Business interest groups in affected sectors such as retail are reported to be lobbying the government for a waiver of rates for 12 months and it is important for a Landlord to ensure a Tenant would be in a position to avail of any reliefs in this regard.

The parties need to consider the circumstances in which the concessions would fall away – for example, consecutive non-payment of rent by the Tenant, persistent breach of other lease provisions or assignment to another tenant.

NB:  A Landlord and Tenant may consider agreeing ‘rent-free’, ‘rent suspension’ or ‘rent reduction’ periods in consideration for an extension of the term of the Lease or the removal of a Tenant break clause, for example. Whilst it is possible to incorporate the foregoing into a side letter, an agreement to vary the lease would be more appropriate. Both parties are reminded that if a Guarantee is in place, any variation of the Lease regarding term or rent will in most cases need to be agreed and confirmed by the Guarantor. Failure to do so could invalidate the guarantee.

  1. Variation of Lease by Agreement

Variation of Lease Agreements are more detailed documents which may be necessary if a Guarantee is in place (as described above) or the recent agreement reached between the Landlord and Tenant in principle is intended to last long-term or it affects key operational clauses of the Lease which requires careful scrutiny. For example, a Landlord may agree to dispense with a ‘keep open’ clause in consideration for a Tenant agreeing to put and keep business interruption insurance in place which might require a knock-on amendment of the definition of Tenant ‘insured risks’ in the Lease. A Variation of Lease Agreement is similar to a Lease in that it must be executed ‘as a deed’ by both parties and if there is a Guarantor, it should be a party too or confirm the agreement by way of a separate document.  In addition, a Landlord funder’s consent to the variation will in most cases be required. However, Revenue has confirmed that no stamp duty is payable upon the execution of a Variation of a Lease Agreement and a stamp duty return is not required.

  1. Mortgages

It perhaps goes without saying that Landlords will be required to engage with their lending institution before reaching any concession or variation of lease in principle. A letter of consent to the variation of the lease agreement will be required in most cases where a funder is involved. It is not in the interests of a lender to enforce against commercial landlords who are in arrears due to the COVID-19 crisis as the lender will be faced with the same problems as the landlord if it was to take possession – engagement may well be positive as a result. In addition, the Banking Payments Federation of Ireland has reported a joint plan of five pillar banks (AIB, Bank of Ireland, PTSB, KBC Bank Ireland plc and Ulster Bank) to introduce working capital supports for businesses affected by the impact of COVID-19 restrictions and Tenants with cash flow shortages are encouraged to avail of all available reliefs at this time.

It is extremely important that all concessions and variation of lease agreements are documented carefully in writing and that Guarantors and Lending Institutions agree to all relevant amendments.  An experienced solicitor in this area could assist a Landlord in protecting its valuable asset and a Tenant by ensuring the agreement reached reflects a fair and workable solution to the issues it faces during this difficult and uncertain time.

Whilst every effort has been made to ensure the accuracy of the information contained in this article, it has been provided for information purposes only and is not intended to constitute legal advice. Amorys Solicitors is a boutique commercial and private client law firm in Sandyford, Dublin 18, Ireland.
For further information and advice in relation to “Dealing With Tenant Inability To Pay Rent In Commercial Leases During COVID-19”, please contact Deirdre Farrell, partner, Amorys Solicitors deirdre@amoryssolicitors.com, telephone 01 213 5940 or your usual contact at Amorys.

The Emergency Measures in the Public Interest (COVID-19) Act 2020

The Emergency Measures in the Public Interest (COVID-19) Act 2020

In response to the COVID -19 epidemic, the houses of the Oireachtas have enacted the Emergency Measures in the Public Interest (COVID -19) Act 2020, (“the Act”).

For the purpose of this article, we will focus on the measures introduced in order to help employers navigate their way through the emergency. The measures introduced are aimed at minimising job losses and the overall impact of the virus on the economy.

Part 7 of the Act

Part 7 of the Act provides for a “temporary wage subsidy” provision for employees who were on the payroll in the business of an employer as of the 29th of February 2020. The temporary wage subsidy provides for a subsidy in wages at the rates set out below for a period of 12 weeks.

In order to be able to avail of this subsidy, the business or employer of an employee must make a declaration to the Revenue Commissioners confirming that by reason of the COVID-19 epidemic, there is at least a 25% reduction in either the employer’s turnover or orders being received by the employer which prevents the employer maintaining normal wages and that regardless, the employer intends to continue to employ the employee.

Subject to compliance by the employer of all provisions within the Act, the following provisions shall apply:-

  1. Where an employee’s weekly pay is less than or equal to €586.00, 70% of the employees take home pay to a maximum of €410.00 will be paid;
  2. Where the employee’s weekly pay is greater than €586.00 and equal to or less than €960.00 a maximum of €350.00 will be paid;
  3. No subsidy is payable in respect of employees whose average net weekly pay exceeds €960.00.

In order to apply for the scheme, employers are required to submit an application via ROS.

Revenue has clarified in recently issued guidance notes on the subject (reply to FAQ 3.11. on page 10) that whilst the subsidy is not subject to PAYE, it will be taxable on the employee at a year-end review.  If the tax assessed as owing by the employee in 2020 is more than his/her unused tax credits at the end of that year, Revenue has clarified that the outstanding tax will be clawed back by reduction of personal tax credits.

It is worth noting that the Revenue requires (see reply to FAQ 4.12. of the guidance notes) an employer to reimburse an employee for any overpayment of PAYE or USC deducted from an employee to date by operation of the Temporary Subsidy Scheme. Whilst Revenue has stated in its guidance notes that it will then reimburse the employer by the amount paid in this regard, the relevant legislation classifies this payment differently to the refund of the subsidy and they may both be paid on different dates (ie one later than the other). In light of this unknown, we would advise consulting your auditor or financial adviser before engaging in the scheme. Further Revenue guidance notes on the reimbursement arrangements are expected to issue on the Revenue website soon.

Revenue has also clarified in further guidance notes that the declaration required to support an employer’s application is not a declaration of insolvency.

Part 8 of the Act

Part 8 of the Act has altered an employee’s right to call on an employer to make them redundant during the emergency period in circumstances where they have been placed on short term lay off or have been laid off as a result of the COVID-19 pandemic. The “emergency period” runs from the 13th of March 2020 to the 31st of May 2020. This period of course may be extended at a later date if deemed necessary.

The practical benefit to an employer of this restriction is that they do not have to retain funds for the purpose of making statutory redundancy payments throughout the emergency period. Ordinarily, an employee would be entitled to call on their employer to make them redundant in circumstances where they have been laid off for 4 weeks or more or where they have been put on the short term for at least 6 weeks in the last 13 weeks.

Clearly the foregoing measures have been introduced as a means of trying to preserve employment throughout the pandemic. The measures provide employers with some comfort in that they cannot be called on to make redundancy payments throughout the emergency period, whilst also with the assistance of the State, employers may be able to maintain payment to their employees.

Whilst every effort has been made to ensure the accuracy of the information contained in this article, it has been provided for information purposes only and is not intended to constitute legal advice. Amorys Solicitors is a boutique commercial and private client law firm in Sandyford, Dublin 18, Ireland.
For further information and advice in relation to “The Emergency Measures in the Public Interest (COVID-19) Act 2020”, please contact Deirdre Farrell, partner, Amorys Solicitors deirdre@amoryssolicitors.com or Brian Kirwan, partner, Amorys Solicitors brian@amoryssolicitors.com, telephone 01 213 5940 or your usual contact at Amorys.

Selling Residential Property in Ireland via Amorys Solicitors

Selling Residential Property via Amorys Solicitors

What are you paying us to do?

When selling residential property you will be required to work in conjunction with your solicitor at Amorys throughout the conveyancing progress. There is certain information only you can provide and if this is done in a timely fashion this will enable the transaction to move forward smoothly for you as the vendor and for the purchaser.

Prior to drawing up contracts, in addition to information gathered from you, the vendor, your solicitor will need to read the title deeds and prepare various documents to provide to the purchaser’s solicitor so that he/she can provide the purchaser with a full picture of the property they are buying.

The steps of selling residential property are as follows:

  1. If there is a mortgage over the property, you will sign a letter of authority which will be sent to your lender by us in order to take up the title deeds. You will also be furnished with an introductory letter, a comprehensive questionnaire and our Guide to Selling Residential Property which attaches a checklist of the documents/ actions required from you.
  2. Once received, your solicitor will read the title documentation in conjunction with the replies to your questionnaire and the following documents will be drawn up:
    • Draft Contract for Sale
    • Replies to Requisitions on Title
    • Family Home Protection Act Declaration
    • Section 72 Declaration
    • Declaration re alterations (if any) to your property
    • Undertaking to discharge your mortgage – if applicable
    • Undertaking to assist with any Land Registry queries which may arise
    • Any other declarations or undertakings which may be required by the purchaser’s solicitor
    • Tax clearance application (if necessary)
  3. If your property is a managed property, enquiries will need to be made with the management company and Multi-Unit Development (MUDs) Act replies to requisitions obtained. In addition, if you are selling an apartment, your solicitor will need to obtain various additional documents from the management company such as an up to date service charge statement and a letter of indemnity in relation to the block insurance policy, all of which must be handed over to the purchaser’s solicitor well in advance of the closing date.
  4. Your solicitor may also need to obtain a letter from the Local Authority confirming the roads and services abutting your property have been taken in charge and a certified copy Folio and Filed Plan from the Land Registry. There may also be planning issues to be dealt with in relation to any alterations or extensions to the property. Further work arises, if your property is the subject of any type of co-ownership agreement with the local council. If your property is registered in the Registry of Deeds, then your solicitor will need to liaise with an architect to provide an approved map for handing over to the purchaser’s solicitor for the purpose of an application for first registration in the Land Registry.
  5. Your solicitor will regularly liaise with you with regard to obtaining other information from you such as Local Property Tax payment and printout, service charge payment and any other queries which may arise via the purchaser’s solicitor.
  6. Your solicitor will need to obtain regularly updated redemption figures from your lender showing the amount required to discharge the loan over your property. This information will be provided to the purchaser’s solicitor prior to the closing date and will also be required to enable your solicitor to discharge the mortgage in full immediately after the sale has completed.
  7. Prior to contracts being signed and exchanged, the purchaser’s solicitor very often raises pre-contract queries which we will deal on your behalf. This may involve some ‘to-ing and fro-ing’ between solicitors until the purchaser and their solicitor are satisfied with the replies.
  8. The purchaser will then sign the contract in duplicate and his/her solicitor will return same with the balance of the deposit to us.
  9. Prior to the closing date, your solicitor will meet with you for the purpose of signing the closing documents referred to. Your solicitor will also need to prepare an apportionment account in relation to Local Property Tax and service charges (if appropriate).
  10. Just before the transaction completes, all title documents, together with the additional closing documents, will be sent to the purchaser’s solicitor. The balance of the purchase moneys will be received into our client account to be held on trust pending a successful completion.
  11. On the closing date, the purchaser’s solicitor will obtain searches which will be transmitted to us for an explanation (if necessary) and certification.

Post-Completion

  1. Once the sale has closed, we will be required to do the following:
    • Discharge all mortgages/loans over the property to your lender
    • Provide you with a cash statement showing all required financial transactions
    • Follow up with the relevant party and discharge any undertakings given to the purchaser’s solicitor
    • Once received, send e-discharge relating to your mortgage to the purchaser’s solicitor
    • Follow up with purchaser’s solicitor to release us from undertakings

The selling residential property procedures above are a simplified version of the conveyancing process. A conveyancing transaction requires many hours of work for your solicitor and every sale is different but all conveyancing cases have one thing in common – they all need the care and attention to detail that only comes from instructing an experienced professional.  We provide excellent value for money to our clients and are confident that we provide a highly competitive and first-class service.

Red Adair once said .. “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur”!

Whilst every effort has been made to ensure the accuracy of the information contained in this article, it has been provided for information purposes only and is not intended to constitute legal advice. Amorys Solicitors is a boutique commercial and private client law firm in Sandyford, Dublin 18, Ireland.
For further information and advice in relation to “Selling Residential Property in Ireland”, please contact Deirdre Farrell, partner, Amorys Solicitors deirdre@amoryssolicitors.com, telephone 01 213 5940 or your usual contact at Amorys.

Reducing Stamp Duty on a Business Asset Sale and Purchase in Ireland

Reducing Stamp Duty on a Business Asset Sale and Purchase in Ireland

It is generally understood that a buyer’s stamp duty liability will be 7.5%1 of the market value consideration paid for all assets passing under a Business Asset Sale and Purchase Agreement executed in Ireland2 but this is not necessarily the case. Below are a few mechanisms by which stamp duty on a business asset sale may be reduced.

  1. Any document executed in connection with the sale of intellectual property is exempt from stamp duty3. This is an important provision as it includes trademarks, copyright, patent and know-how and goodwill attaching to same4.
  2. It is possible, in some cases, to avoid stamp duty on the sale of plant and machinery, goods, wares and merchandise5. In order to do so, a buyer will need to agree in the Business Asset Sale and Purchase Agreement for ownership to these items to pass ‘by delivery’ and must not require a formal instrument evidencing the transfer of ownership on closing6.
  3. Similarly, it may be possible to avoid stamp duty on the acquisition of a debt (deemed consideration for stamp duty purposes), if the buyer agreed the debt would transfer ‘on delivery’. This could be effected by the production of a bearer instrument7 to the buyer on completion. Alternatively, the debt may be transferred by a novation agreement which, unlike an assignment8, would not classify the debt as a ‘conveyance on sale’ for stamp duty purposes9.
  4. The transfer of loan capital of a company or body corporate is exempt from stamp duty10 provided certain conditions are met. Broadly, the loan capital must not carry a right of conversion into shares of an Irish company, must not carry rights similar to rights attaching to shares (e.g. voting rights, right to profits etc), must not be issued for a price which is less than 90% of its nominal value and must not carry a right to interest which is related to movements in an index.
  5. Any instrument executed in connection with the sale of foreign property is exempt from stamp duty11. This can be extremely useful in circumstances where the seller is non-resident as movable property (including potentially the seller’s debts) could be deemed to be situated in the Seller’s country of residence, rather than in Ireland.
  6. Instruments executed in connection with the sale of residential property attract stamp duty of 1% of the market value of the consideration paid12. Residential property includes mobile and other holiday homes. This is a useful and valuable provision for buyers looking to acquire a residential property portfolio.
  7. Many instruments relating to the financial services industry such as debt-factoring agreements13, financial futures and contracts for difference are exempt from stamp duty14.
1 Stamp duty on non-residential property is typically charged as a ‘conveyance on sale’ at this rate – see Schedule 1, Stamp Duties Consolidation Act, 1999 (“SDCA ‘99”) as amended by section 57 of the Finance Act 2019.
2 The charge to stamp duty liability arises under s. 2 SDCA ’99 in relation to instruments executed “in Ireland”
4 Goodwill will be exempt only to the extent that it is directly attributable to the intellectual property in question. Where there is business goodwill and goodwill that is attributable to the intellectual property, the consideration must be apportioned between the two on a just and reasonable basis.
5 See section 31 Stamp Duties Consolidation Act, 1999 which provides that contracts for the sale of these movables are exempt from stamp duty
6 Circumstances of the transaction will dictate if this is advisable. Careful drafting of the relevant clause is required so as not to render the contract stamp-able as a ‘conveyance on sale’ under schedule 1, SDCA ’99.
7bearer instrument, or bearer bond, is a type of fixed-income security in which no ownership information is recorded and the security is issued in physical form to the purchaser. The holder is presumed to be the owner, and whoever is in possession of the physical bond is entitled to the coupon payments.
8 An assignment is considered a “conveyance or transfer on sale of any property other than stocks or marketable securities or a policy of insurance of a policy of life insurance” (commonly known as “Conveyance on Sale”) under schedule 1 SDCA ’99.
9 A novation agreement would involve the execution of a tripartite agreement by the original lender, the borrower and the party acquiring the debt. The suitability of this option will depend on the facts of the transaction, for example, it would not normally be an appropriate means of transferring a large portfolio of debts as it would require execution by each individual debtor
11 S.2 SDCA ’99 (charge to stamp duty) and see section 31 of the SDCA which provides for the exemption of contracts for sale of foreign property (as opposed to ‘conveyances’)
13 The exemption does not apply if the instruments relate to shares in Irish companies or land or buildings in Ireland s. 90 SDCA ‘99

An ‘asset sale’ has many advantages over a ‘share sale’ for both the buyer and the seller. For example, a seller may be in a position to crystallise a tax loss to offset a gain and a buyer has the potential to avoid uncrystallised gains in its accounts after completion.  Consequently, a purchaser should not summarily dismiss structuring a transaction as an ‘asset sale’ as the tax cost may be less than what it may seem at first instance.

Whilst every effort has been made to ensure the accuracy of the information contained in this article, it has been provided for information purposes only and is not intended to constitute legal advice. Amorys Solicitors is a boutique commercial and private client law firm in Sandyford, Dublin 18, Ireland.
For further information and advice in relation to “Reducing Stamp Duty on a Business Asset Sale and Purchase in Ireland”, please contact Deirdre Farrell, partner, Amorys Solicitors deirdre@amoryssolicitors.com, telephone 01 213 5940 or your usual contact at Amorys.

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