Our Company, which is a manufacturing Co, has no retained profits but owns a property and has a revaluation reserve on it balance sheet,as the property we have as gone up in value over the years. We would like to transfer the property out of the trading property and was thinking of setting up a holding company to do this.
I am told this is not possible unless we have any retained profits, is this true.
As I see it ,we can set up a holding company with the existing shareholders of the trading co. Do a share swap, so the holding Co owns the trading co and the shareholders would then own the holding co.
The trading Co could then sell property to holding Co and as a consequence the holding Co would then have a debt owed to the trading co.
As the property has then been sold, would the trading company's revaluation reserve then be transfered to the retained profits reserve and hence allow a dividend to be paid to the holding Co to pay off most of the debt the holding Co would have to the trading company. Are we allowed to do this and are there any tax implications if we do.
The purpose of the transaction would be to protect the shareholders assets should anything go wrong with the trading co.
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You will get people’s backs up if you come on a public forum asking questions that you should be asking your company’s accountant, without explaining why. Is there a reason?
Well said John.
I'd add that it's not sensible to expect a forum to be able to answer a question of this type. EVEN IF the OP concludes that some members of the forum disagree with the accountant, so what?
I did ask our company accountant and he said we could not do this as we had not retained profits . I was not convinced so I though I would put the question on this forum . to get a second opinion
I am not an accountant, but what you don't explain is what the balance sheet of the property owning company looks like. A lot of company law is designed to protect creditors.
If I were
a) To be an accountant ... and
b) To be willing to give a free second opinion
I would want to see the balance sheet.
I think you would find that the numbers don't stack up. Your accountant has spotted that, I've spotted it, you haven't.
That makes the rest of this contribution otiose, but I'll say it anyway: as your objective is a legal one, it would sensible to take legal advice as well as the tax advice you obviously need.
If it is to protect the property from any insolvency/liquidation in the future, it won't work, unless as your accountant says there are sufficient retained earnings.
You'll transfer it at market value, and it is hard to envisage the revaluation reserve increasing retained earnings enough unless the property in question was brought a fairly long time ago.
If the transaction goes ahead, there will be all sorts to consider including entrepreneurs relief, VAT, SDLT, group relief on transfer, capital allowances, the list goes on, so best to get paid for, tailored advice rather than generic advice from forum users who do not know the full picture.
My apologies if I should not have been asking this question here.
I don't understand why it should get anyone's back up!
To respond to the last two comments though
The balance sheet would still be positive if we transferred the property from a trading company to a holding company
The trading company is making profits but, there are no retained profits (or very little at present , certainly not enough to pay a dividend to a holding company to buy the property at a fair market price anyway) as profits have been distributed as dividends in the past.
I was told that this transfer of assets could only be done by using the retained profits to give dividend to holding co.
I just wanted to know if a revaluation reserve could be used in the way I have suggested . Thank you Justin for confirming it could (in the right circumstances)
We also have a Capital redemption reserve which I presume can also be realize in the same way as the revaluation reserve when considering transferring a property from a trading Co to a Holding co.
I will take on board your last comment tax dragon and do exactly what you suggest.
The value of the revaluation reserve ,and capital redemption reserve would stack up to the value of the property. The balance sheet of the trading co ( if these reserves were removed) would still remain positive so I think the numbers would stack up unless I am not understanding things correctly
Thank you for your comments
I will take on board your last comment tax dragon and do exactly what you suggest.
Good decision. As you will appreciate afterwards.
I think you can distribute the capital redemption reserve .
Section 733(6) of the Companies Act 2006 seems to suggest that this reserve can be treated as if it were paid up share capital. Therefore the company just follow the procedure as for the reduction of capital in Companies Act 2006
This allows the reserve to be transferred into distributable profits then paid to the holding Co as a dividend to be used to buy the property.
You just need to pass a special resolution supported by a solvency statement made by all company directors and deliver certain documents to Companies House and ensure the Mem & Arts allow it (if not amend them)
Yes of course, but I meant that you can’t distribute it in the ordinary course of events, as the OP was assuming you could.