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Is Entrepreneurs Relief available on a disposal

Is Entrepreneurs Relief available on a disposal to a connected company

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We have a client who wishes to dispose of a company that they own by way of 49% share capital to external investors and the remaining 51% to a dormant company they already own. There is only one share class, they current owners are employees and officers and have been for a number of years, the dormant company doesnt have any cash so will have to use its future dividends to settle the debt. Would entreprenuers relief apply, the business is valued at £500k.

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18th Jul 2019 12:30

On the disposal of the 51% you are probably not looking at CGT at all. It is probably caught by the TiS rules meaning it will be taxed as a dividend essentially.

As for the other 49% it would depend on what the company actually does and what its balance sheet looks like.

Not enough information to say.

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18th Jul 2019 12:37

The above response may be correct in relation to the application of the TiS rules, but it may not be., hence the use of the word probably.

The current 100% seems to be held by a number of individuals. Much will depend on their connectedness and if they are unconnected a full analysis of who is disposing what to whom.

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By CW2012
18th Jul 2019 12:40

Thanks for the reply, the 49% would be disposed off via loan notes as the purchasers don't have the cash, I'm happy with this bit, its the E R on disposal to a company under the same ownership, the TiS rules were looking a bit problematic. The company being bought has £200k in the bank, this would make up part of the dividends that would fund the share purchase. Is this a non starter

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to CW2012
18th Jul 2019 12:50

Start by asking the question as to why they don't just sell 49% to the external purchaser and leave it at that. What is the commercial rationale for transferring the remaining 51% to dormant co?

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to Wilson Philips
18th Jul 2019 13:00

And add into the mix how the existing 100% is owned and how the owners are connected (if at all). Not including that information does not simplify things.

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By CW2012
18th Jul 2019 12:59

Funnily enough there is a degree of rationality to it, they want to create a property portfolio in a limited company, they have one already which will be transferred into the company (cheap commercial no SDLT and v limited CGT).
One of the shareholders / directors is terminally ill so wants to withdraw from the trading enterprise create an investment for his wife and children, I believe that in the longer the purchasing company may also receive share capital of another company, so it will end up as a mixed "investment" company for legacy purposes.

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to CW2012
18th Jul 2019 13:06

Well, the precise facts will [help to] determine the tax position but since we don't know that the precise facts are ...

And how does transferring a trading company to a dormant company assist in creating a property portfolio?

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to CW2012
18th Jul 2019 13:06

So it's a property investment vehicle that you're asking an entrepreneurs' relief question about?

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By CW2012
18th Jul 2019 13:45

The transfer of 51% share capital will provide a dividend stream into the limited company giving it cash to buy properties, we're a bit away from the original question though.

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to CW2012
18th Jul 2019 14:00

We were never anywhere near the original question

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to CW2012
18th Jul 2019 14:13

But in the first instance, providing a dividend stream that would otherwise be charged to income tax but charged to CGT. Why not go for share-for-share and pay no CGT at all? Why not pay dividends to the existing owners who could then invest in/lend to property company? Why not lend directly from trading company to property company?

As we know, there is no rule that dictates that one course of action must be followed in preference to another but these (and probably others) are all questions that need to be considered in the face of potential challenge by HMRC.

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By CW2012
18th Jul 2019 14:57

Thanks, the disposal of shares via CGT would have presented a nice 10% CGT (ER) charge on cash extraction which the directors could have reinvested into the "holding company"giving a DLA balance and cash to invest. A share for share exchange would be a half way house, the question is though is E R available on the sale of the trading company shares to the holding company.

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to CW2012
18th Jul 2019 15:06

CW2012 wrote:
Thanks, the disposal of shares via CGT would have presented a nice 10% CGT (ER) charge on cash extraction

Therein lies the potential problem.

The answer to your question is that provided the conditions are met, ER should be available. For ER to be applicable, though, the gain needs first to be taxed as capital and not income. On that point, I doubt that anyone here would be able to answer that with certainty. If only there were some way of asking HMRC in advance ...

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to Wilson Philips
18th Jul 2019 15:18

Snap. My comment below (made before I had seen yours here) is supposed to say what you say.

I just don't have your way with words.

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to CW2012
18th Jul 2019 15:08

Why would it not - apart from it's not CGT in the first place?

It's not goodwill etc - it's shares.

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