Qualifying Trading Company and Entrepreneurs relief

Qualifying Trading Company and Entrepreneurs...

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Following up on an earlier question this week, my client is a successful trading company, with a substantial cash balance. Other than extracting the cash and pay the tax I am doing some forward planning and obviously need to  ensure Q trading status is maintained..

He has a property development opportunity and if the funds are extracted personally by a dividend then over 30% of dividend tax to pay so ideally the gross amount should be invested by the company.

Don't want to sound stupid but my question is. Is it  possible to have a situation whereby, the surplus cash is invested by the company 'tainted amount' and in due course when the company is sold, ER is obtained @10% but for the tainted investment CGT is paid at 28%. This has been suggested to me but can not find any info on this. 

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By User deleted
10th Mar 2015 13:00

Sorry, but you'll need to clarify the question

You talk about extraction of funds and, at the same time, investment by the company.

And you refer to your client as being a company and at the same time refer to "he".

Please explain exactly what is being proposed.

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By Martin B
10th Mar 2015 14:19

BDK

If funds are extracted by way of a large dividend - 'he' the director invests.

To avoid the tax associated with the dividend then company to invest.

 

 

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By User deleted
10th Mar 2015 15:06

In which case I still don't really understand the question.

The shares in the company will either qualify for ER or they will not. You cannot split the gain into a qualifying part and a non-qualifying part. (There is one exception, irrelevant to this case - where EMI and non-EMI shares are involved.)

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By Martin B
11th Mar 2015 16:04

BKD

Thank you BDK

I have come up with the following. On the basis that the qualifying conditions for ER need to be only satisfied for12 months prior to disposal of the shares. The successful trading company ( A) gives a loan to new company (B). Don't know when A will be sold.

Company B can start trading and in due course when ceases to trade, repay the loan to A and  voluntary liquidation and obtain ER.

Company A. Sometime in the future having received the loan repayment  takes the necessary steps to ensure qualified status is again obtained- possibly by a large dividend payment ( pay the appropriate personal tax 30% as mentioned in my OP- not now but a few years down the line ) and in due course  to obtain ER.

Vital company A can obtain ER in due course. If my suggestion does not work than the only real alternative is for A to make a large dividend payment now and the director/shareholder invests in company B a lower amount as dividend tax to pay. My suggestion would give the cash flow advantage now ,of not having to pay the tax on the dividends.

I would appreciate comments.

 

 

 

 

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paddle steamer
By DJKL
11th Mar 2015 16:50

If your ER in A is already tainted

If your ER in Company A is already tainted (excess cash argument- albeit if passively held there may be an argument it still qualifies) why not set up a wholly owned trading subsidiary  of A, Company B, instead of a stand alone associate  Company B ,and  A invests directly in it rather than lends to it.

There may well be a stronger argument for a trading group and ER if it is an investment in a trading company.

Your argument that once B has repaid a loan A will sort itself into trading status via dividends appears expensive.

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