Group structure to invest in property

Group structure to invest in property

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I have a client who has runs a LTD as a commercial property agency.

It has cash surplus and a very healthy balance sheet.

He wants to invest in residential property but he already draws cash in top tax bracket so to draw a further say £200k for a deposit would attract a lot of tax.

My idea is to set-up a new holding company to hold the shares in the trading LTD and also a newly set-up LTD to invest in property.

This way some of the trading company's cash/value can be "transferred" to the holding co/parent (better protected this way?) and also it means he can invest in property (through the LTD) without drawing more huge sums.

Few questions:

1. Does this seem a good idea?

2. Does it affect entrepreneurs relief in the future?

Many thanks

Replies (4)

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By User deleted
28th May 2014 10:03

Certainly a good idea ...

... to keep the trading and investment activities apart. As for Entrepreneurs' Relief in the future, the answer can only be "it may do". It will depend on the circumstances at the time.

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By julian.sims
28th May 2014 17:03

Effective but risk of future cost

I agree that your structure works and has a two main benefits :

- protects investment assets from trading risk

- allows investment in the properties after payment of CT (20%) not IT (?45%)

The downside will be potential future tax costs :

- loss of Entrepreneurs Relief (CGT) if the investment side becomes too large

- loss (or restriction) of Business Property Relief (IHT) again if investment side becomes too large

I suggest client needs to understand the potential future costs but overall strcuture can be very appropriate.

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paddle steamer
By DJKL
29th May 2014 12:01

Entrepreneurs Relief

 

I would carefully consider whether the existing company's shares would currently be eligible for Entrepreneur's relief anyway, given it already appear to hold significant, presumably liquid, resources; these may have already tainted its shares.I have a client with a trading company that had accumulated significant bank deposits from retained earnings and my view,and that of another firm, was that the shares would not be eligible for ER anyway. In this instance, as the client had no personal need for the funds, his company has become a hybrid, it still trades and the suplus funds are now invested mainly in FTSE 100 companies paying a reasonable dividend. Eventually when he retires the trade will cease and the company will just continue receiving dividends and will be able to pay the client dividends as and when he wants them in retirement; a bit like a drawdown pension arrangement

If not already tainted a stand alone company, not within a Group, may work, however a cross company loan from the existing will be a non "trade" asset anyway. Whilst initially the existing company may be tainted for ER a separate company does give time for the loan to possibly be repaid and the existing company to maybe revert, before wind up/ sale,to be ER qualifying.

The Group idea does of course have the possibility of maybe using any losses sideways e.g surplus non trade loan relationship deficits, but does more permanently link the property investment company to the trading company both being held by the holding company. To decouple would likely involve the sale of the investment property by the newco subsidiary and a wind up of same or a sale of the newco by the holding company.

Given the nature of the existing company, and vat part exemption issues that could arise if it were to purchase residential property, I believe a distinct company is maybe the way to go, however whether a stand alone or a group position probably revolves around the existing shareholder's  future plans re exit/ sale in the future.

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paddle steamer
By DJKL
29th May 2014 12:12

ATED

 

Sorry, forgot to flag, given £200,000 deposit I presume that property will not either initially, or in future, fall in to the ATED regime i.e. even if over threshold it will be let at arms length etc?

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