Parents owned a profitable trading company. They took out income of £200,000 between them tax-efficiently annually, but there was a significant cash reserve within the company which only increased each year. They wanted to use the profits to benefit the family tax-efficiently, and also to invest for their family.
The main challenge was how to extract the profits from the company without paying any additional tax on dividends, or winding up a successful trading company. Risks included:
If the company continued to accumulate cash, or use that cash to invest, there was a risk that any sale of the shares would not attract Business Asset Disposal Relief in the hands of the shareholders.
If the owners wished to continue running the company and later gift shares within the family, inheritance tax may apply if they died within seven years of the date of the gift.
On any onward transmission of the shares in the company on death it may no longer considered to be a trading company because of the accumulated cash.
We set up a Family Investment Company (FIC). The shares of the FIC were set up so that the parents owned the voting shares, and the children held shares with dividend rights (and rights on winding-up).
Using a combination of different share rights, and a bespoke shareholder’s agreement and Articles of Association, shares could be passed tax-efficiently to the children.
Dividends can be paid tax-efficiently to the FIC, and the parents were able to direct that it be invested in a certain way e.g. allowing the children's trust to pay for school or university fees. This saved £12,500 of tax annually compared to them extracting the funds into their own hands first.
Dividends received from the trading company were reinvested into rental property. Holding property via the company meant that all of the mortgage interest on the rental property was tax-deductible. The company also pays a lower tax rate on the rental income than the parents would if they owned it personally.
As the value of the FIC increased, anything over £1 million passed into the shares owned by the children and the trust. This growth dropped out of the parent’s estate, reducing the parent’s inheritance tax liability by £400,000 to date.
This saving is expected to increase as the investments within the FIC, which include rental property let to a third party, grow. The trading company is also very firmly established to be within both business asset disposal and business property reliefs, creating potential inheritance tax savings of over £800,000 and reducing tax on up to £1 million of gain per parent on sale of their shares by 10% (a potential £100,000 saving each).
The family pay around £15,000 to £16,000 less income tax than before the structure was set up, and have potentially saved over £600,000 of inheritance tax, with more savings to come as the portfolio of investments in the FIC grows.
A family company with two subsidiary companies predominantly involved with property investments. One subsidiary was a trading company. The group had a value of around £4m of which investments amounted to £2.8m, making the shares held in the holding company ineligible for business asset disposal relief or business property relief. The elderly parents held a 58% stake and wanted to pass assets to their children who worked in the business tax effiiciently.
The aim was to pass the trading side of the group to the two children while gifting away as much of the investment side to mitigate potential inheritance tax. The challenge was to find a way to achieve this that suited the families wishes without triggering significant tax and ensuring that commercially the trade remaining intact within the current subsidiary.
The solution was to extract the trading subsidiary from the group by way of a capital reduction demerger so that all the shareholders held the same proportion of shares albeit in a new wholly trading group. This would then allow the parents to gift their shares to the children in the new trading group and claim CGT hold-over gift relief.
Shares held in the remaining investment group could in part be gifted into trust using available nil rate bands for IHT and holding over capital gains tax.
The steps involved the following:
Formation of a new holding company share for share to create sufficient capital in order to carry out the demerger.
Moving assets within the group on a tax neutral basis to facilitate the demerger of the trading subsidiary.
A reduction of share capital equal to the value of the trading subsidiary in exchange for the transfer of shares in that subsidiary to a newly formed standalone company, which issued shares to the same shareholders in the same proportion as they held via the holding company.
Tax clearances were obtained for corporation tax, capital gains tax, income tax and stamp duty arising from the transaction.
Subsequent gifts of shares were undertaken post demerge and as a result the parents saved around £420k in potential IHT with minimal tax cost.
Very profitable company operated in a niche market with one major customer, it had built up a large cash balance.
As the business operated from rented accommodation the owners felt it was the right time to use the cash to acquire their own premises but were nervous about having all their assets in one company operating an unpredictable trade.
Extracting the cash from the company without having to pay tax. Creating a structure which offered protection in terms of the holding of the property going forward.
Create a new holding company and form a group above the existing trading company. Cash could then flow between companies without incurring a tax liabilities to allow the holding company to purchase the trading property.
Tax clearances and stamp duty relief were obtained in respect of the new share structure which mirrored the structure in the trading company.
The required structure was established with no tax cost and the use of the cash reduced the risk that HMRC could argue that the company was no longer a trading company.
Our approach to tax efficient restructuring
Just as every business is unique, there is no one structure that works for everyone.
Considering your business structure throughout your business lifecycle will ensure you and your company benefit from tax reliefs and you achieve your goals.
Our aim is to understand your challenges, your goals for the future and the assets that matter in order to create a bespoke approach for you and your business structure.
Restructuring can be complicated but with the right advice, it can achieve your objectives. We’ve helped thousands of businesses rethink their structures to make the most of the available tax reliefs and protect their assets.
