A family company with two subsidiary companies predominantly involved with property investments. One subsidiary was however 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 latter was an issue for elderly parents who held a 58% stake and who wanted to pass assets to their children who worked in the business.
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.
Parents run a profitable pharmacy business. Their son also runs his own pharmacy company and often acted as locum to his parent's business.
The parents wanted to retire but wanted to retain the business for the benefit of the family while securing funds for retirement. The obvious solution was to sell the business to the son who was keen to expand his business.
The primary challenge was to find a way to facilitate the sale of the business to the son, given that the son did not have personal funds to buy his parents business direct.
A company purchase of own shares was considered but this would mean that the son would have to become a shareholder in the existing company to leave him as the sole shareholder.
Commercially it was better for the son’s company to acquire the shares held by his parent creating a group structure. Funds could be paid up by way of dividend to pay the consideration to the parents.
Given the connection between the parties it was felt that a tax clearance was needed to avoid income tax under transactions in securities and this was obtained.
The transaction was undertaken achieving the aims of the family. The parents were able to claim business asset disposal relief on the share sale so the gain was taxed at a 10% rate. The only other tax cost was stamp duty on the acquisition of shares.
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