Prior to the sale of a business, our client has formed a holding company to transfer a property out of the trading company to retain this. He will then sell the trading company and retain the cash and the property within the holding company.
The accountants acting for the purchaser has suggested that the property must be transferred for company law purposes at market value. Does any have any experiences of this. I am aware of the tax and stamp duty implications.
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Distribution
No requirement to transfer at market value. It could be for nil consideration and hence be a distribution in specie, assuming the company has sufficient distributable reserves.
You say you are aware of the tax consequences. Have you obtained tax clearance for this? In a similar scenario some years ago I had tax clearance refused. Is the client happy for all the proceeds to be locked within the new company?
If you don't transfer at MV ....
.... then there will always be the possibility that the transferor company gets into trouble and goes into liquidation. It would then be open to a liquidator to argue that there was a transfer at undervalue and come back to the holding company for the amount of the undervalue. This will apply for at least six years. Some argue indefiniitely.
So best to do it at MV - particularly if the transferor company is going to be sold. But there is nothing that makes it compulsory.
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How is this working through?
1- Shareholder swaps his Trading company shares for newly issued shares in Holding company. (clearance applied for that the reorganisation rules apply)
2- Group is formed and certain assets are hived into Holding company with no tax consequences.
3- Holding company then sells Trading company shares to purchaser and is left with cash and property.
Is it not the case that the gain on the trading company shares arising in Holding company will be subject to Corp Tax. Whereas previously the gain would probably have been subject to 10%.. I appreciate that this wont solve the issue with the property.. Buut could a distribution in species of the property not be carried out and then a transfer of the shares.
I dont know, but just interested in how these are put together?
Benefits
It is true that the new holding co is subject to CT on the sale of the sub but the gain should be minimal as the base cost of the shares will be market value at the time of the reorganisation. Hence HMRC may be reluctant to grant clearance. It would normally not be sensible to distribute the property to the individual shareholders because of the higher rate tax cost. Better would be a sale at market value with the consideration left outstanding temporarily. This leaves the value within the company. The shares are sold and part of the proceeds applied to pay for the property. This way the value is taxed at (hopefully) 10% rather than 25/36.1%. Either way there is potentially a capital gain on the property which is avoided by using the holding company route.
There may be better ways than all of the above depending on the client's requirements and the size of the numbers involved. Hence my questions in my earlier post.
Re MBK's comments I thought the comeback was limited to 2 years unless it could be shown that the company was insolvent at the time of the distribution (which I assume isn't the case). Would it be better to sell at market value and declare a cash dividend to pay for the property?
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gbuckell,
Can you confirm because I am having a slow day...
when shareholder swaps his 100 £1 shares in Trading Co for new shares in Holding co, what is the entry here?
Assume that the value of the 100 shares of Trade co was is £500k.
Would the entry within Holding co be DR share investment £500k, Credit Issue of shares £500k (possibly share premium)
Shareholder is left with an investment in Holding co worth £500k but with a tax base cost of £100?
Correct?
Broadly correct
You are correct except that an alternative accounting treatment would be for the holding company to record it at £100. This is by application of merger relief (or is it merger accounting - I never remember!). Either way the base cost of the Trading Co shares for tax purposes becomes £500k.