Sale of company

Sale of company

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Hi all,

After discussing this issue with a number of colleagues and failing to come up with a good solution, I am hoping someone out there may be able to help me.

A client of mine is selling his limited company but wishes to remove all properties, cash and assets from it before doing so.

As the company has long standing contracts with it's main customers, setting up a new limited company for the trade is not an option as this would constitue a breach of contract and mean that the customers could be lost.

A lot of people are saying the answer is to set up a holding company, transfer all of the assets out, and then sell the original company on to the buyers.  However, I think that this would trigger a capital gains charge due to a change of ownership within 6 years.

Therefore, my question is is there a way of doing this without triggering an immediate tax charge?

Thank you in advance to all who can assist.

Replies (7)

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By gbuckell
28th Jul 2011 17:44

Demerger?

The holding company route might work.

The new company would acquire Oldco in a share-for-share exchange. Tangible assets can then be stripped out by dividend. This leaves the trade and goodwill behind. The base cost of Oldco in the hands of Newco is market value at the time of the reorganisation. Thus Newco can sell Oldco with no tax charge. Of course one then has a company stuffed full of cash. If the shareholder wants some for personal use he will pay tax - as a dividend unless Newco is wound up (which rather defeats the point of it).

Not sure about your reference to 6 years. Are you thinking about an exit charge under TCGA 1992 s179? This cannot apply to Oldco as no assets have been transferred to it or to Newco as it is not leaving the group.

Your problem with this scheme is that HMRC will probably refuse clearance under TCGA 1992 s138 for the initial reorganisation to be tax free.

If the objective is to sell the trading company whilst retaining properties and cash then a solution more likely to get HMRC clearance is a liquidation demerger. In brief the structure above is established following which Newco is liquidated. All assets except shares in Oldco are transferred to Newco2 and shares in Oldco are transferred to Newco3. The shareholder then sells the shares in Newco3 to the buyer. Shareholder pays tax on his gain (presumably at 10%) but only on the value of the goodwill. All the other assets now in Newco2 are retained without triggering any tax costs. The shareholder has also got some cash with only 10% tax.

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By MBK
29th Jul 2011 08:39

I doubt a demerger will work ....

... because, in essence, there needs to be some kind of continuing business in both demerged entities. Even if you can justify two businesses HMRC generally won't give clearance where there is an intention to sell one of the demerged businesses - because the purpose of demerger relief is not to facilitate tax efficient sales.

As you say, creating a holding company and selling the subsid doesn't work because of the de-grouping rules.

Why not simply sell the shares in the company and get the buyer to pay an increased price representing the surplus assets and then your guy buys the surplus assets with the price increase? That certainly works for everything other than properties - where there may be SDLT and tax on chargeable gains to consider. It depends on the numbers as to whether this would be an acceptable cost.

If this is unacceptable there is one possibility I am aware of but have never tested in practice - you would need to get some specialist advice. As I understand it what you do is form a new (dormant) holding company (H) which becomes the holding company of your existing company (A) via a paper for paper. H then forms a new 100% subsidiary (S). A then transfers the properties and other assets to S - tax free at that point as intra group. The shares in A are then sold by H - no tax on the sale as pointed out by the previous respondent. The theory goes that, because the degrouping  charge only applies where a company that has received chargeable assets leaves the group, there is no charge because it is not S that has left the group. Contrast this with a simple holding company / subsidiary where they both leave the group on a sale of A. In such circumstances they have both left the group because there is no longer any group.

Not sure what the SDLT position is and, of course, there is the problem that the sale proceeds / cash etc are stuck in the new group of H and S. But that may be acceptable to your client(s) if they want to continue to be active in (say) property investment.

The problem with this approach (and this is where specialist advice is vital) is that you need to get clearance for it - and that might well be tricky in the circumstances.

The optimum answer may ultimately lie in a mix and match of the above.

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By gbuckell
29th Jul 2011 10:42

Demerger may be possible

I agree that a statutory demerger cannot work if the intention is to sell one of the demerged businesses. However, this restriction does not apply to liquidation demergers (using IA 1986 s110). I also agree that there needs to be a business to be demerged but generally if there are properties these can constitute a business if let out. I did exactly this type of demerger (splitting some rental properties and surplus cash from a trading entity) in late 2006 and obtained clearance. However, it is possible that HMRC's attitude has hardened since then.

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By dhughes1975
29th Jul 2011 14:47

First of all, I would like to thank you both for your advice, yo

issues to be considered here.

Following on from the last point made, the properties are to remain in the new company for the forseeable future and leased back to the buyers.  As the properties are almost essential to the buyer, this arrangement would be key to any deal.

Does this factor make the 'demerger' option a more realistic proposition?

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By gbuckell
29th Jul 2011 16:34

Should be okay

To avoid a capital gain being triggered on the properties when transferred from Newco1 to Newco2 in my example, it is necessary to transfer a business (TCGA 1992 s139). In your case, the properties are currently being used in the company and probably do not constitute a business in their own right. However, in my previous case, we transferred the properties to the new holding company (Newco1) and put leases in place back to the old company (there was a bit of rental property as well as trading premises). At this point a letting business is created and s139 should apply - certainly HMRC did not object. The properties are then transferred to Newco2 subject to the leases already in place.

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By Ernest N Dever
29th Jul 2011 17:27

TiS

gbuckell, what's your thinking on whether a liquidation of this type is a transaction in securities under the redrawn legislation.

I'm troubled by the words "liquidation as a 'transaction in securities': under the predecessor legislation it was established that a liquidation was not a transaction in securities. The basis of that decision has been undermined by the amendments" on page 2 of this article: http://www.taxcounsel.co.uk/ImageLibrary/000-000_TA_1010_Transactions%20in%20securities.pdf.

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By gbuckell
29th Jul 2011 17:44

TiS

I admit to not having studied the new legislation in depth. As the liquidation is only part of the overall process, my gut feeling is that the TiS rules could potentially apply to this both under the old and new regime. Certainly a TiS clearance application would be made alongside the clearance applications under s138 and s139.  In a case admittedly some years ago I attempted a liquidation demerger in a case where a trading operation was being split in two and only 50% of one part was being sold. HMRC refused the TiS clearance on the grounds that the vendor was not losing control of the part of which he was selling 50%. In my view he was losing control but the deal fell through before I had a chance to argue the point with HMRC.

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