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Hi, I currently own a business (51% stake with my wife retaining…

Hi, I currently own a business...
Hi,

I currently own a business (51% stake with my wife retaining the rest) and am about to acquire a 15% stake in another business.

In addition I am going to be launching a new business in the next 8 weeks and will have an 80% stake which will reduce down to 60% if my business partner achieves agreed sales targets.

The question is whether it would be better for me to own the stakes in the new business in my own name or whether I should use my existing company to hold the shares - which I have done before.

Are there any tax benefits to either scenario and are there any risks associated in particular if one of the businesses I am taking a stake in goes into administration or liquidation.

Thanks in advance for your advice.

Neil
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Answered in 22 minutes by:
7/9/2012
TaxVince
TaxVince, Accountant
Category: UK Tax
Satisfied Customers: 972
Experience: Chartered Accountant >20 years + Qualified IFA
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Hi

I hope i can assist. Please clarify if you are a sole trader or you have registered these companies as limited companies. As you may know that a sole trader is personally liable for all the business liabilities and if the businesses takes a turn for the worse, it can lead to the nightmare scenario of losing all your assets no matter what structures you have in place. This is different from limited companies as liabilities are limited to company level. The tax implications of sole trader business/limited partnerships are also different and hence if you clarify the question - i would be able to assist further.
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Customer reply replied 6 years ago
Hi,

All companies are and will be limited companies.

Thanks,

Neil
Hi Neil
The main tax benefit of owning the underlying investment through your existing company is the group relief schemes eg. if one company makes trading losses, you can get them taken off from another company’s taxable profit (within the same group), thereby reducing your overall tax. Broadly, the grouping requirement for this relief applies if one company has 75% or more of the other company's ordinary share capital, through direct or indirect ownership. Losses can be surrendered in any direction – from parent to subsidiary company, subsidiary to parent company or sister to sister company – if the companies satisfy these tests. To see the list of group reliefs check out this link http://www.hmrc.gov.uk/manuals/ctmanual/CTM80110.htm
In terms of liquidation/solvency/administration risk, there is not much difference between the two structures ie whether you own directly or through other companies as liability in limited at each company level i.e limited company.
One other advantage of a group structure is that its easier to transfer funds between companies whether on temporary or permanent basis, though too many inter company transactions may not be desirable given that you intend to reduce your ownership. Another advantage of group structure is that its easier to support a subsidiary through the holding company providing a letter of support/comfort/guarantee to a subsidiary, without exposing your personal assets to solvency risk.

In conclusion, if your underlying investment is likely to be 60 % as you said, there seem to be no group reliefs benefit; and the administration/solvency issues are hardly affected with either structure; therefore there is no difference between the two structures in terms of tax and financial risk. It might be better to go one which is easier to implement.

 

Regards
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Customer reply replied 6 years ago
Hi,

Thanks, XXXXX XXXXX your feedback so far.

In terms of tax however if I were to own by equity stakes as an individual rather than through a holding company does that not affect corporation tax rates for the companies I own 50.1% + of?

Neil
Hi Neil

Sorry for late reply. None of the two affect your effective corporation rate. Im sure you are referring to the issue of associated companies. Companies are associated when they are controlled by the same person or persons (whether this is in a group structure or if they stand separately to each other) - therefore in your case either way the two companies are associated companies.

Associated companies affect corporation tax rate as follows:

The Corporation Tax rates for a company with no associates for the 2012/13 tax year are as follows:

Taxed at 20% The first £300,000 of taxable profits
Taxed at 25% The next £1,200,000 of taxable profits
Taxed at 24% All taxable profits exceeding £1,500,000

However, if there are associated companies these limits are divided equally between them. For example, for a company with two other associates (i.e. three companies in all), the limits must be divided by three. Each company will calculate its tax bill in accordance with the following rates:

Taxed at 20% The first £100,000 of taxable profits
Taxed at 25% The next £400,000 of taxable profits
Taxed at 24% All taxable profits exceeding £500,000

The idea behind these rules is to prevent companies running their activities through multiple companies in order to keep their taxable profits in the 20% band.

If the profits of the companies are unevenly distributed the effect of these rules can be to dramatically increase the effective rate of Corporation Tax. This happens when unprofitable companies do not use their 20% tax bands to the full, whilst their associates pay tax at 25%.

Therefore in conclusion, there are many good commercial reasons to invest through another company rather than directly - to reinforce the identity of subsidiaries, to protect other group companies from the potential liabilities of a risky venture, easier interco transfers, etc. But there is not much tax difference between the two options.

Regards
TaxVince
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