Business bought to be run by third party

Business bought to be run by third party

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Hi all,

I've been approached by a wealthy client and his wife who are almost completing on buying a pub business/premises as a going concern.  The plan is to let the premises out to a third party (his brother in law) and they receive rent.  The third party will run the business and account for his own income and tax etc.

However I suggested that entrepreneurs relief (ER) could be attainable in the future when he comes to sell.  I have several questions/issues/considerations that I would appreciate some advice on.  In a nutshell I am pondering what structure he should adopt to allow the third party to earn the profits, while they can receive income for renting the building which they own but set it up so that they still own the business so that ER can be claimed in the future.

VAT - My understanding is that the purchaser needs to be VAT registered at the time of purchase to qualify the VAT exemption under the TOGC rules?  The purchaser will therefore need to either register as a partnership or as a Ltd Co?

What structure will be best? I initially thought that a Ltd Co will be ideal, as he and his wife can own the business by the shareholdings and the third party can be the director and pay himself the profits by way of salary and dividends as he sees fit.  However of the property is in the company how can an arrangement be made for the owners to receive their intended 'rents'?

SUMMARY

Perhaps it's best if i summarise what we are tying to achieve and then see what suggestions come back!

1) VAT - No VAT on the purchase (the seller is VAT registered)

2) Owners (husband and wife) keep ownership for capital purposes but the income (excluding 'rent') is retained by the third party who is running the business (pub)

3) The owners qualify for ER at 10% when it is sold

4) The issues and other thoughts I have are a) the sale is almost complete in the husband and wife's name so there wouldn't be time to set up a Ltd Co and this would change the whole process anyway as the company would be buying the business and has no financial history b) could there be some sort of partnership set up where the owners retain legal ownership the party who runs the business gets most of the income (apart from a market rental equivalent)

ADDITIONAL NOTES - The sale is due to complete within the next week or so! The owner is a HR tax payer and owns rental property of c£2m+ (plus PPR of 2.75m)

I have decent general tax knowledge around individuals, Ltd, VAT and fairly OK with CGT (limited with IHT) but am a 'general practitioner'.  However I am half contemplating passing this client onto a tax specialist firm that I have a good working relationship with.

Thanks in advance for your time!

Replies (15)

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By User deleted
19th May 2014 08:20

Just a couple of initial thoughts

TOGC - what do your clients intend to do with the business/premises immediately after purchase?

What measures are you suggesting be taken to secure ER?

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Steve Edwards
By stevo5678
19th May 2014 10:59

Hi BKD,

 

They just want to receive 'rents' or an equivalent amount and let the brother in law run the business and keep the 'profit'.

The steps I'm thinking are to comply with the ER requirements IE they will own the 'business' for the qualifying time period. EG if it's a Ltd company they would own the shares.

 

Cheers

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By User deleted
19th May 2014 11:08

Two thoughts

What are they buying?

If they re buying the trade, assets and property, but are planning to immediately rent the property for someone else to carry on the business then you may have difficulty in making TOGC stick.

If they're letting the property for use in someone else's business, what makes you think that ER would be available?

Thanks (1)
Replying to alisonis:
Steve Edwards
By stevo5678
19th May 2014 11:30

@ BKD

It's not 'someone else's business', surely you understand that not all businesses are owner managed...

What is wrong with shareholders paying someone else to run a business? Whether they want a bigger share or not or profits is their choice.

Also I think I've explained pretty clear what they are buying...

 

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By jamesbailey
19th May 2014 11:24

Why not a partnership?

One solution would be to form a partnership with the brother in law.

Your client and his wife could take their "rent"as their profit share, with the balance of profit going to the bro.

Only downside is NIC but this might be a price worth paying for the sake of ER.

Thanks (1)
Replying to RogerMT:
Steve Edwards
By stevo5678
19th May 2014 11:31

Thanks James, this crossed my mind and works for income tax but not sure how it could be structured for capital gains as the third party does not own anything as such?

Steve

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By jamesbailey
19th May 2014 11:35

Partnership

The ownership of the property can be dealt with through the Partnership Agreement.

Ideally the bro should have a very small share in the property as then it will be a partnership asset and qualify for 100%BPR for IHT purposes. If it's only owned by the clients, then BPR is at 50% - but of course it would have been nil if they had rented it out.

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Replying to Justin Bryant:
Steve Edwards
By stevo5678
19th May 2014 11:40

Perfect, thanks James.

 

Is it too late to go down the Ltd route as the whole process up to this point has been done via the husband and wife and so would the finance?  I'm not even sure how a new company would get such finance, I presume via the directors guarantee and persona earnings potential.

 

Steve

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By User deleted
19th May 2014 11:39

Not that clear at all

The plan is to let the premises out to a third party (his brother in law) and they receive rent. The third party will run the business and account for his own income and tax etc

Thanks (1)
Replying to Wanderer:
Steve Edwards
By stevo5678
19th May 2014 11:44


That's correct, but if it can be structured in a more tax efficient way, would this  not be more desirable?

 

Plus they have bought a business and not just a property.  It is their choice to do as they wish with it.

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Replying to lendainty:
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By User deleted
19th May 2014 11:58

Choice

stevo5678 wrote:

Plus they have bought a business and not just a property.  It is their choice to do as they wish with it.

Absolutely correct. But just don't complain if the tax outcome is not as expected or hoped for.

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By jamesbailey
19th May 2014 11:48

Company

I don't see the merit of a company.

Generally speaking, people buying pubs want direct ownership rather than buying shares, so the most likely exit route is a sale of the premises. If this is done by the company, the gain is taxed at 20%and to get the cash out you have to liquidate - significant professional fees - to get your ER on the shares.

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Replying to Tax Dragon:
Steve Edwards
By stevo5678
19th May 2014 11:52

Ok thanks James, that seems to make sense. 

I will certainly explore that avenue.

Thank again!

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Replying to Tax Dragon:
Steve Edwards
By stevo5678
19th May 2014 12:15

Hi James,

If they sell the business/property in say 10 years rather than holding onto it and claiming BPR on death, I assume they will qualify for ER if it has been registered as a partnership?

 

Thank

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By jamesbailey
19th May 2014 12:26

Yes

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