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