company split - a bit clumsy

company split - a bit clumsy

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Client company currently makes c£350k PBT.

Shareholders are two unconnected individuals. 50:50.  Both work full time for the company.

One of the two (Mr A) likes to spend whereas the other (Mr B) doesnt need the cash at this moment and would prefer to retain in the company.

They have taken their "remuneration" historically by way of small saalry and large dividends.

The two have come to a disagreement about the amount of "remuneration" that should be taken from the company. 

Mr B is unhappy that he is paying tax on his dividends when he would prefer to retain and build up the capital in the company.

Mr B has advised that he would like to investigate the idea of both A & B setting up their own company and their existing shares in trade co will be transferred to the respective newco's.  Thereafter annual divis will be paid to the newcos (still on a 50:50 basis) and the newcos can either dividned up further in the case of Mr A of not in the case of Mr B's newco.

Tradeco has little value becuase 80% of its income is from one customer and is very reliant on the personal skills of Mr A & B.

If we could agree a low valuation with HMRC on the disposal of the tradeco shares do we reckon this is a price worth paying.  I would personally not like to go for the share for share clearance that s135 applies on this because whilst I could possibly argue commercial benefits and bona fide etc.. I feel that it is quite easy to argue a low value on the tradco shares.

Having mulled over this at the weekend, (because initially I didnt like it, I thought it was very clumsy) I think it might work OK. 

Mr B is adamant that he wants to build up a personal corporate piggy bank to draw dividends into his retirement.  It is quite important that they don't fall out over this.

Any other thoughts?

Replies (5)

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By Steve Kesby
13th Feb 2012 11:26

Mr A

Surely Mr A doesn't need to do anything?  He can just continue as is?

It's only Mr B that needs to have the corporate piggy bank, surely?

Also, my understanding is that S.135 applies automatically, unless either:

there aren't bona fide commercial reasons, orthere is a tax avoidance motive, or both.

So by not obtaining clearance, you don't know the right answer. You can, of course, force the position by selling the shares to Newco though.

Thanks (1)
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By blok
13th Feb 2012 12:02

.

I take your point about Mr A, which is a fairly basic point I had missed. 

The idea is that I would force the point by agreeing a sale to newco.  This will in turn create an Investment addition in Newco with a corresponding credit to the DLA.  I will get this valuation agreed by HMRC to avoid any fall back. 

What about the TIS rules?  Should I get clearance under s701 ITA07?

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By Steve Kesby
13th Feb 2012 12:47

Probably

There's probably not a transaction in securities issue here, although I can see arguments both ways.  So it's probably prudent to get the clearance, or use the procedure to identify any issues.

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By MBK
14th Feb 2012 13:46

Surely the creation of Newco...

... with Newco buying shares falls squarely within the TIS legislation? Isn't it this sort of transaction the legislation is designed to catch?

I don't see why / how a straight paper for paper (which will, for sure, get clearance) isn't much the better option.

You need to be sure that there are no casting vote provisions in the articles of Tradeco to avoid newco and Tradeco becoming associated.

 

Thanks (1)
By Steve Kesby
14th Feb 2012 14:03

Only

if the effect of the transaction is to create a capital gain where there might otherwise be an income distribution.  The shareholders' disagreement concerns the extent to which the profits are currently being distributed.

If there are no distributable reserves, there cannot be an income tax advantage (somewhere in S.687, I think).  If the distributable reserves are small, so is that advantage, and a counteraction notice would then be unlikely.

Otherwise I agree entirely, but had understood there to be a desire to avoid falling within S.135.

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