Protection of company assets in an economic downturn
Limited companies are a well-known method used to limit an individual’s exposure to claims and avoid losing personal assets if their business gets into financial difficulties. However, even if a valuable asset is owned in a limited company rather than personally, if the company is a trading business, the value of that asset is still potentially exposed to creditors of the company.
How could this risk be reduced?
A company reorganisation could potentially be the solution to this issue. A new holding company is a common route used to protect various assets, including cash and property. There would therefore be two companies.
- The holding company, owning the business’ valuable assets.
- The trading company, that is able to use the assets, but does not actually own them.
This can protect the assets in the Holdco if a legal claim is made against the trading company, or if the company were to get into financial difficulties, as the asset would be far less easy to be called upon by the creditors / claimants of the trading company, assuming that the asset was moved by way of a dividend at a time when the company had sufficient reserves to support this.
There are alternatives, such as transferring the property into a new subsidiary of the trading company, but this doesn’t protect the property as the shares of that new company are then an asset of the main trading company and can potentially be claimed against.
How does it work?
The new company would acquire the existing company, and the shareholders would receive shares in the holding company (a ‘share exchange’). The assets that the shareholders wish to protect would be distributed up to the new holding company, usually by a distribution in specie. The distributing company must have sufficient distributable reserves to support the transaction, and so legal/accounting advice must be taken.
If a holding company route is used, there is a wider discussion to be had as to what assets should be transferred into that Holdco, and whether there are any other companies with the same ownership that could be acquired.
What are the tax considerations?
1. Capital Gains Tax
There are Capital Gains Tax (CGT) considerations of inserting a holding company, as the restructure can trigger CGT for the shareholders. To avoid CGT, clearance needs to be requested from HMRC that share-for-share exchange relief will apply.
If HMRC agrees the reorganisation is being undertaken not for tax avoidance reasons, the new shares would simply ‘stand in the shoes’ of the old shares, which can also be beneficial for certain tax reliefs.
HMRC practices on agreeing these has changed, in that there was a period of time (around 2020) when they were taking commercial purpose to have to be a trading purpose. If you were therefore doing this purely to ringfence cash or investments (not to do with the trade), they could decline to give clearance.
Fortunately, they’ve softened on that stance, but there’s never any guarantee that clearance will be granted. Clearance is important to receive as without this CGT can be payable without the shareholders having physically received any cash.
A minimum of 25% of the trading company needs to be sold to the holding company for this relief, but in practice this would usually be at least 50% (to retain trading group status), and if less than 100% HMRC might be more likely to question the commerciality of the arrangement.
2. Stamp duty
Another consideration is stamp duty, which can apply when there is a transfer of shares in a UK company (in this case the holding company acquiring the trading company).
However, stamp duty relief can apply when certain conditions are met, and when this applies no stamp duty should become payable on the restructure (although this relief is subject to anti-avoidance provisions).
3. Substantial Shareholding Exemption
Inserting a holding company could potentially allow the trading subsidiary to be sold free from corporation tax, under an exemption called the Substantial Shareholding Exemption (SSE). Previously the rules for a company to be able to claim this relief were stricter, in that the investing company was required to be a trading company, or part of a trading group.
This changed in 2016 and this condition was removed. To qualify for the relief now, only the subsidiary must be a trading company, and 10% of its share capital must have been held for a continuous minimum period of 12 months in the 6 years prior to its sale.
SSE could be beneficial if the company has a planned use for the sales proceeds, and the use of a holding company could also avoid triggering a lot of CGT at once on a sale of the trading company’s shares.
Once in place, dividends taken up to the holding company that are not extracted from that company will be sheltered from income tax. Generally speaking, there is also no corporation tax on dividend income between companies.
Another option to protect valuable assets from a trading company would be to demerge them into a separate company. As the asset would be in a separate legal entity from the trading company, it should likewise be protected from a claim against the trading company.
HMRC approved demergers can be done free of tax and stamp duty if approved steps are followed. However, even without any taxes, there would be professional advice costs, as well as costs of implementing the demerger itself.
This is not a like for like comparison to the holding company idea, because the demerged assets will often then not get inheritance tax relief, or qualify for CGT reliefs, as they would if part of a trading group.
Both legal and tax advice is strongly recommended to be sought prior to any type of company reorganisation, to ensure that the planning idea is a viable option for your specific company circumstances.
If the property or valuable asset is not owned yet, ideally this advice should be sought before the property is acquired, to ensure the best structure for your needs is achieved.
If you have any questions about the above, or would like more information specific to your circumstances, please enter your email address below and we will get in touch: