Entrepreneur Relief and holding company

Entrepreneur Relief when a shareholder wants to hold shares via holding company.

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A shareholder and director owns 33.3% of the shares in a trading company with a third-party limited company holding the other  66.7%.

As dividend levels and timing are effectively controlled by the majority shareholder this means the minority shareholder may be impacted by higher rates of tax due to the timing of dividends. 

He is therefore considering setting my a new company to hold the shares via a share-for-share exchange. This should mean that the minority shareholder can smooth out his income by holding the dividends in the new holdco or should he choose to make other investments.

His only concern is that should he in the future wish to sell his shares in the trading company, presumably by selling the holdco would he still be able to claim Entrepreneur's Relief as the new holdco may not be a trading company.

This would not have been an issue if it had held >50% of the JV as it would be treated as a group. However, does the smaller minority shareholding mean that the Director must continue to hold the shares directly in the trading company or is it possible to define the trading company as a joint venture which would then allow the shares in the Holdco to qualify for Entrepreneur Relief?

 

 

Replies (4)

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By nrw2
05th Oct 2023 13:15

BADR is only available on shares in trading companies. A company which exists solely to hold a minority shareholding in a trading company is not a trading a company.

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Replying to nrw2:
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By Coops
05th Oct 2023 17:45

I'm not sure that your second sentence is correct nrw2 - see the joint venture company rules at section 165A and schedule 7ZA, which are explained in this link:

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64081

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By philrob
05th Oct 2023 13:26

He needs to hold the shares directly for BADR, but if the issue is timing of dividend income then there are options.

This has been referred by HMRC to the Upper Tribunal, but at the moment:

Final Dividends (Declared by the Shareholders in a General Meeting) are taxable on the date they are declared. On that date the shareholders are entitled to the dividend and become a creditor to the company in the event it goes bust between declaring the dividend and paying it out.

Interim Dividends (Declared by the Directors in a Board Meeting) are taxable on the date that the shareholder receives the Cash (which is great for tax planning). The downside is that the creditor relationship isn't created. So it is possible for Shareholder A to receive the dividend, the company to go pop, and shareholder B isn't even on the list of creditors.

https://www.rossmartin.co.uk/sme-tax-news/6656-interim-dividends-taxed-w... has the details.

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By JCresswellTax
05th Oct 2023 13:59

You need to start talking about Business Asset Disposal Relief as Entrepreneur's relief is no more.

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