May 2001 ATII Paper IIB

3. On 1 May 1998, James Stuart (aged 30) formed a company, Bingo Ltd that runs bingoand casino type games at private parties. At all times James has owned the entireissued share capital of 100 ordinary shares of £1 each.On 1 May 2003, NetBingo.Com Ltd was incorporated to provide an on-line bingo game.The issued share capital of 100 ordinary shares of £1 each has been owned sinceincorporation as follows:• 90 A shares by James Stuart• 10 B shares by the finance director, Charles BrownThe two classes of share rank pari-passu as regards votes and capital, and wereoriginally created in order to allow differing dividends to be paid to the shareholders,although this has never been done. The company became very successful and it wasfelt that Charles’ contribution should be recognised through an increased equity stake.On 1 May 2004, both shareholders agreed that the rights attaching to the A and Bshares should be varied such that each class of shares is entitled to 50% of the votes,50% of all dividends, and 50% of the assets on a winding up, and the Articles ofAssociation were changed accordingly. At this time the entire company was worth£400,000.On 1 April 2005 an offer was received for both companies that valued Bingo Ltd at£500,000 and NetBingo.Com Ltd at £5 million. On 2 April 2005, James sold his sharesin NetBingo.Com Ltd to Bingo Ltd. The consideration was the issue of a further 100ordinary shares. On1 May 2005 James then sold his shares in Bingo Ltd for cash of £3million and Charles sold his shares in NetBingo.Com Ltd for cash of £2.5 million.You are required to calculate (with explanations) the capital gains arising onJames as a result of the above transactions assuming that any appropriateclaims are made. You should ignore any discount that would apply to a minorityholding.You are NOT required to comment on any other taxes, to compute Charles’capital gains, or to compute the Capital Gains Tax payable. (10)S/May 2001/5 3