Gain on value of IP

D

danash

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Hi,

I will be seeking professional advice but I just wanted to try something here first. Let's say I was developing a product and suddenly someone thought it was a good idea and decided to invest.

Let's say a new company was required to house the new product and the new investor cash. I would have shares in the new company. The new company would have a valuation based on the new money.

Do I realise a capital gain on the new (notional) value of my shares in the new company immediately or only if I actually cashed out ?
 
Good question and there a few issues here. If for simplicity purposes you ignore the asset is IP for the moment and let's say it was a building. If you transfer your building into a company it will trigger a capital gains tax liablity for the you despite that you will not be paid for it in cash. The first question I would ask for IP if whether it was an asset in the first instance for CGT purposes - is it goodwill, is it knowhow, is a trademark (registered or unregistered) and this is not a straightforward question. If it is an asset then you will have a CGT liability.

You may be able to transfer your asset to your company (tax free) via a three party share for undertaking swap. There are lots of rules here and it would need to be a trade (or perhaps a business) but not an asset on its own. Each of matters is complex and you'll need your expert tax advice. Best of luck and I hope it goes well for you.
 
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dublin67 said:
If you transfer your building out of a company it will trigger a capital gains tax liablity for the you despite that you will not be paid for it in cash.
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Surely the OP is talking about transferring the asset into a company rather than out of it?

I'd agree 100% with your advice "you'll need your expert tax advice".

I'm no expert in this (other than having been a participant in similar transactions), but I'd be quite surprised if there is any liability at this stage. Surely any liability only occurs when the value of the asset is realised, either by the sale of the IP by the company that now owns it or the sale of shares in that company?

The "normal" way I've seen this work is Joe starts a company, paying some nominal amount for shares (say €100 for 100 shares). Joe works away at building value in the company, or simply gives ownership of something that he's already developed - Joe doesn't receive anything for this work or gift. Fred then comes around and says they'd like to invest, so gives €100k for 100 new shares (i.e. post money valuation is €200k). Things go well and 3 years later Big Company Inc. purchases the company for €1m by purchasing all shares. Joe then has a capital gain liability on his gain of €500k - €100; Fred has a liability on his gain of €500k - €100k. Is that not how it works? Note: I apreciate this is somewhat of a simplification, but it's just to illustrate the basic point.
 
newtothis said:
Surely any liability only occurs when the value of the asset is realised, either by the sale of the IP by the company that now owns it or the sale of shares in that company?
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If we go back to the property example for a minute, the transfer of property from the person to the company is a trigger for CGT as they are separate parties. Transferring an asset to a company is no different to selling it to a 3rd party.

This arises frequently on the incorporation of sole trade businesses. So luckily there's a relief available that effectively defers the liability until the shares are sold - Transfer of Business Relief (Section 600 Tax Consolidation Act 1997). There are conditions attached, so requires tax advice.

Then we're back to the question of whether the IP is an asset that attracts CGT on disposal in the first place.
 
RedOnion said:
the transfer of property from the person to the company is a trigger for CGT as they are separate parties. Transferring an asset to a company is no different to selling it to a 3rd party.
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Understood, and I'd accept it's a "trigger", but how can a liability arise if there is no (or a tiny nominal amount of) cash involved in the transaction? I'd accept that there may well be issues if the asset is property, but surely not for IP or (for example) office furniture?

As I said, I'm no expert, but I've actually done this in the past and it was never queried by our accountants or raised as an issue.
 
Say there's no company involved. It's just you and me.

If I've an asset currently worth 100k, and I gift it to you for free (I'm generous today).
Even though I don't receive anything, my CGT is based on the market value.

Depreciating assets like office furniture are a different story.

There's are lots of reliefs available, so it's unusual for CGT to be paid.

I'm not a tax professional either, so not familiar with the practicalities.
 
newtothis said:
Understood, and I'd accept it's a "trigger", but how can a liability arise if there is no (or a tiny nominal amount of) cash involved in the transaction? I'd accept that there may well be issues if the asset is property, but surely not for IP or (for example) office furniture?

As I said, I'm no expert, but I've actually done this in the past and it was never queried by our accountants or raised as an issue.
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Because of Section 547(4) of the Taxes Consolidation Act...
https://www.charteredaccountants.ie/taxsource/1997/en/act/pub/0039/sec0547.html
 
It all goes down to the value of the IP at the time of transfer. If the IP has no value then transferring it won't create a tax liability. If it does have it has value (and it constitutes an asset for CGT) then you have a CGT disposal and CGT applies. Section 600 is that I had in mind for the share for undertaking swap.
 
Ah, OK - that makes sense, all turning on: "subject to the Capital Gains Tax Acts, a person’s acquisition of an asset shall for the purposes of those Acts be deemed to be for a consideration equal to the market value of the asset". Thanks for the various clarifications - the original response to the OP didn't make much sense to me.

By the way, regardless of any reliefs available, there's a very strong case that any IP gifted to a company at startup has effectively no value. IP - at least in the technology sector I'm familiar with - tends to have value only when packaged with a team capable of understanding and exploiting it. If you doubt this, try selling some IP in the absense of having that in place.
 
newtothis said:
Ah, OK - that makes sense, all turning on: "subject to the Capital Gains Tax Acts, a person’s acquisition of an asset shall for the purposes of those Acts be deemed to be for a consideration equal to the market value of the asset". Thanks for the various clarifications - the original response to the OP didn't make much sense to me.

By the way, regardless of any reliefs available, there's a very strong case that any IP gifted to a company at startup has effectively no value. IP - at least in the technology sector I'm familiar with - tends to have value only when packaged with a team capable of understanding and exploiting it. If you doubt this, try selling some IP in the absense of having that in place.
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Well that certainly makes sense on one level, on the other hand if I am the person with the intellectual property, and you and I set up a company together where you get half the equity for €100,000 and I get half the equity for my intellectual property, it's hard to see how your investment doesn't effectively value my IP at €100,000...?
 
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torblednam said:
Well that certainly makes sense on one level, on the other hand if I am the person with the intellectual property, and you and I set up a company together where you get half the equity for €100,000 and I get half the equity for my intellectual property, it's hard to see how your investment doesn't effectively value my IP at €100,000...?
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That's an interesting point, and I can see the logic. However, I'd say the value is only realised when the resources are in place to exploit it. In other words, even the notional value of €100k for the IP is only there post-investment, not before. Even then, it would be amazing if someone paid €200k the day after the investment.

I'd come back to the very basic point: a thing is worth what someone somewhere is prepared to pay for it.

I'd say you've quite a challenge to sell any (unproven) IP for €100k. The same IP with a team behind it and a track record is another matter. I've seen this at the other end of a company life-cycle: for a variety of reasons, a company I know was failing. It had some serious IP, backed by multiple patents. Whilst most of the team were still in place, they had serious offers (by serious, I mean in the 10s of millions of €), which fell away for a variety of reasons. When the team had mostly gone due to redundancies, they couldn't get any offer at all, despite the same IP being included. My conclusion from what I've observed is that ideas by themselves have very little value. If you don't believe me, try and sell some and see the value placed on them.
 
My view is that this discussion raises the critical issues that arise when IP is being transferred.

The first issue is what is being transferred - for example is it know how, trade secrets, mark (e.g. trademark) - registered or unregistered, design or patent and there are many others. Registered IP (e.g. patent, trademark) is a bit easier to understand but how about the unregistered types such as know how or trade secrets. Additionally are all of these categories of IP assets for CGT purposes and this may lead to some head scratching. It may be another issue altogether if such as asset can be capitalised on the balance sheet.

The second issue is valuation and the pricing of intangibles is a topic that PHD dissertations have been written on. Share valuation has been called a black art but I'm not sure what you would call IP valuation. If a piece of registered IP is bought and it has a revenue stream from licences then standard valuation rules may apply. But how about the scenarios described above when you have an idea, or some research, that needs a specific team to develop it and bring it to revenue generating stage. The pricing of intangibles has now become even more complex with the BEPS changes. While this may only be for the big boys the rules may have impact to much smaller companies.
 
Thanks for your replies - all interesting stuff. Let me add some further context. The product is a software App and currently has consumed 500K of seed capital. There is minimal revenue so far - 60K.

I note the points above in that the product is a function of the features and the team - as without me there is no real value ( at least in the short term ). The real question applies in that the IP does not have any real value without - me, the team - and the investor cash. I don't have the funds to develop it so I cant see how it could be a trade valued at the new money level of the business as it will take another two years to get significant traction.

My plan was to take a loan note in the NEWCO as a consideration for transfer of the IP / renunciation of a future IP challenge. Could this loan note - which will not be repaid until exit be seen as a consideration ? It seems bizarre that I would take a tax hit at such an early stage of development. If this is the case then the company would fail anyhow as I cannot meet such a demand.
 
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