Paying Surplus cash to a new co

Going round and round with this. Client company has large reserves. He wants to set up another...

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Going round and round with this.  Client company has large reserves. He wants to set up another company which will invest in residential property.

This 'newco' will purchase the residential property using cash sat in the back of the existing company.

That's what he wants to do.  

Can we increase share capital and issue 1 minority share in existing company to the newco, enabling a dividend to be paid from existing cash rich company to newco, which newco will use to invest in property.

I am thinking that newco will be purchasing a share at an undervalue.  I am thinking this will create a tax charge on the director under ERS (as company is gaining a share by reason of the director's employment).

Am I correct?

If so, then the only way this can be done is to loan funds from company 1 to newco.

If loan is subsequently written off, then unlike an individual who would be taxed as though he received a dividend, the company would be liable to pay Corp tax on the amount written off.

Any other structures that would achieve this aim that I'm missing?

Thanks for listening!

 

 

 

Replies (7)

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paddle steamer
By DJKL
10th Oct 2018 16:52

Are existing shareholders fussed about subsequent ER relief, in effect is existing company a trading company?

Does preserving BPR matter to them?

If reserves ( cash in effect) was to be distributed would it be replenished via trading by existing company?

Are any losses envisaged in the future?

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By Manchester_man
10th Oct 2018 23:56

I'm now thinking that the most simple way forward is for existing company to loan the funds to newco. Presumably the loan can be written off at a later date and the tax position will be neutral, by virtue of CTA09/S.358, as both companies are connected (existing company is owned 100% by Mr and newco is owned 50/50 Mr & Mrs).

Thanks to DJKL for your comments. The answers are, yes ER is important to the shareholder of the existing company (trading company).

BPR not as much an issue.

Reserves will increase each year, but not too the extent that Surplus cash is accumulated again.

Unlikely to be any losses in the near future.

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Replying to Manchester_man:
ALISK
By atleastisoundknowledgable...
11th Oct 2018 08:05

Manchester_man wrote:

I'm now thinking that the most simple way forward is for existing company to loan the funds to newco.

Rightly or wrongly, this would be my standard advice in this sort of situation. I might try and put a holdco in for good measure, but that depends on the client and loss availability (you’ve said not). And maybe H doesn’t want W to have any interest in tradeco. A&B shares in holdco? Anyway, just thinking aloud now, I like a good A/B structure for H&W companies...

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Replying to Manchester_man:
By johngroganjga
11th Oct 2018 11:21

Why are you assuming that the loan will be waived in the future? What would be the point of doing that?

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Replying to johngroganjga:
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By Manchester_man
11th Oct 2018 12:56

Client isn't happy that the loan will be technically repayable on demand. He wants the funds to be (in his words) "gifted" to the newco, so that the balance sheet of newco doesn't just show assets = investment property, liabilities = loan, net assets = not a lot.

Writing off the loan, whilst not in the best interests of the shareholders, would not negatively affect creditors as the company has no creditors other than CT.

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Replying to Manchester_man:
paddle steamer
By DJKL
11th Oct 2018 15:18

If stripping cash /reserves out would mean future benefit of ER would be greatly reduced anyway (and reserves not really replenished) then as the property company shares will likely not be eligible for ER then on that basis any loan and w/off will eliminate most of any ER benefit.

If two trades in existing company might be scope to examine exempt demerger rules but given future intention with company B not convinced that helps, it also still does not deal with lost ER issue re the moved value if company B shares will not be eligible.

Being flippant ,persuading the client that residential property is overrated and has he considered a SIPP and commercial property might work but will likely take years to get a SIPP to point when it can have enough funds to buy a commercial property.

Does he have a timetable re how long he intends to continue trading via Company A might be a question worth asking?

https://www.taxjournal.com/articles/practice-guide-taxation-demergers-24...

Once full picture re client's future plans ascertained then if numbers were significant I think I would be phoning a friend.

Thanks (1)
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By Manchester_man
11th Oct 2018 21:09

Thanks DJKL for your time in answering this, I really appreciate your help.

I've already advised that a SIPP might be a better choice, as he was considering commercial property investment not long ago, but now he is convinced buying 2 residential properties will be a good investment. He is thinking he can net 40k per annum in rent from 2 "2 up / 2 down houses". I've told him I think he will net nearer to half that figure!

He is aware that ER will not be available to the residential property investment company.

Thanks again.
I'm clear now and am going to chat to him more and see what his thoughts are.

The following is the background story, in case you are interested, that's all.

He has always had a great business (1 company) making 100k per annum and he draws much less than that out.

The plan was for him to put the company into a MVL on retirement and enjoy 10% ER on the distribution.

However, his business is unfortunately in a sector that has been greatly hit by Brexit. The monthly figures over the past 2 years show a worrying decline (which he predicted).

He's not ready to retire yet and his idea was to liquidate the company and start a new one doing the same thing, until he spoke to me and I told him about the anti avoidance rules re setting up again within 2 years.

So now he is looking to supplement the reduction in profits with rental income, whilst continuing to trade his main company, putting in more hours and accepting less lucrative work, for as long as he can.

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