Joint venture property development opportunity

Joint venture property development opportunity

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Client has an existing successful trading company with significant cash reserves. He has an opportunity to invest a in regular projects with a property developer, whereby my clients puts up the initial funds and the profits are shared equally. Initial investment around £600k to be rolled over. Est. profit £200k per project so my client share £100k.

Client is a higher are tax payer, does not need any additional income and wants the investment to grow and then in the future draw tax efficiently. I have thought about it and have come up with the following.

Set up a new ltd co with a formal loan from existing company at an arms length rate. The new co then invests  the funds/loan  to the property developer in return for the ongoing share of regular profits which would be subject to corporation tax.  This will carry on for the forceable future until sometime in the future when they agree to stop, then all loans received and repaid. At this stage new co will have post tax reserves/cash which can be extracted by a formal liquidation and a CGT of 10%.

20% rule re-excess funds-existing company.

With regard to the existing trading company in due course he will want entrepreneurs relief on disposal. So I  am thinking this will be ok as except for the £600k  'tainted funds'   subject to CGT @28% the balance will be 10%

Doe this make sense and would appreciate comments 

Replies (3)

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paddle steamer
By DJKL
09th Mar 2015 11:09

Little concerned tax tail wagging the dog

I tend to try to look at these arrangements from a business/ control aspect and only thereafter consider  tax.

Whilst we know that your client is prepared to invest £600k into these joint deals what you do not say is what vehicle is being used for the joint deals, is it the property developer's existing business, an SPV, a corporate beast, a partnership what? These will of course have a bearing on tax/ extraction of funds.

Next control/ liability- what say has your client in any of the arrangements, has he say , if a partnership ,got joint and several liability etc?

What sort of exit provisions within the structure are envisaged/ shareholder agreements/ exit routes etc, is the entity to be a body corporate responsible for its own tax or say a tax transparent LLP?

Why does your client need the intervening company to invest in the end entity, does it serve a purpose, if so what?

I find the best way to look at these sorts of structures/ arrangements is to draw a schematic showing funds flow in and out and also control/security rights/obligations. Once these are clear some of the planning re tax can then be considered more fully.

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By Martin B
09th Mar 2015 14:58

DJKL

Thanks for your input

I am just thinking based on what makes sense and the clients circumstances (ie does not need income and hence wants profits retained and rolled over).

The plan is to have a JV agreement for each development via the new company. Plus this will mean he is  not restricted with the same developer. Each party  would be responsible for their own tax liability etc. I think this should possible and is this not the way it works in operation.

Separate new company also had the benefit that existing company is protected from any issues like you mention and not to forget that in a few years time flexibility to liquidate with a CGT of 10% and not linked to existing company's plans.

I just wanted some reassurance that my thinking was correct.

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paddle steamer
By DJKL
09th Mar 2015 15:42

Your ER thoughts re Oldco

"With regard to the existing trading company in due course he will want entrepreneurs relief on disposal. So I  am thinking this will be ok as except for the £600k  'tainted funds'   subject to CGT @28% the balance will be 10%"

Sorry, I intended to say I am not sure of your some assets qualifying some not  comments above in your original post. I thought the shares either qualified or they didn't? The composition of the company's activities will be a determinant of whether oldco's shares (Company A) qualify or do not qualify, not convinced they can part qualify at differential tax rates as you suggest?

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