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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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.
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?