This week we are going to look at some options for a business sale.Two weeks ago, we looked at Business Property Relief in action. This is relevant if you are making or receiving a gift or inheritance of business property. In case you missed it click here. It relates to a very interesting case that came to us in the last few weeks. We will focus on
- Issues for the seller
- The company sells the assets
- Hive out the trade
- Hive up the property
- Summary
The Seller
Bryn Wynn Jones and his wife Winnie own 50% each of a successful trading company, Tan Orgasmic Ltd [TOL]. Both are in their early 40s and work full-time in the company. They purchased the business 8 years ago. TOL purchased Goodwill [customers] for €800,000. About 2 years ago the company purchased a residential property for €1.1 million. TOL has also invested €125,000 in fixtures and fittings.
A competitor has made an inquiry to Bryn about buying the business. The initial offer is to buy the business for €1.2 million. This is €1.1 million for Goodwill and €100,000 for the fixtures and fittings. Bryn is unsure how to structure the sale and the purchaser is open to options once it works for them too. Bryn has done his research and knows that Entrepreneurs Relief offers a 10% rate of CGT on a sale. He wants to hold onto the residential property but is unsure of what way this should work. He also wants the sale to be as tax efficient as possible.
The Company sells the assets
So TOL decides to sell the assets. This is straightforward.
| Sales Proceeds | €1,100,000 | |
| Less Cost | €800,000 | |
| Gain | €300,000 | |
| Tax Payable | 33% | €99,000 |
The company can’t claim Entrepreneurs relief as that only applies to individuals. There is no gain on the sale of the fixtures and fittings so there is no CGT payable on those. After the sale the company has €1.1 million in cash and a property, per Bryn, that is worth €1 million. This is not a bad position to be in, but Bryn and Winnie didn’t get any cash into their own hands. It is all still in TOL.
Hive out the Trade
Why would we do this? The Wynn Jones don’t want to sell the shares in TOL because the property is in there. Nor do the purchasers want the property. They can set up a Newco and transfer the trade, fixtures & fittings, staff, etc. to that company. Wynn Jones will have to register the new company for taxes and set up a new bank account. They will need to confirm the change with customers and suppliers.
While this is an admin headache, it is doable. There are various CGT reliefs at both company and shareholder level to ensure no tax leakage. One of the key points when doing this is to ensure the shareholdings in the Newco match that of the other company. They will now have two companies. TOL with the residential property and Newco with the trade.
Newco is a clean company, so it is attractive for the purchasers to buy this. They will also save Stamp Duty on the purchase. Buying shares is liable to stamp duty at 1% while buying assets is at 7.5%. On a deal worth €1.2 million that is a saving of €78,000.
The Wynn Jones can now sell their shares in Newco. But will they get Entrepreneurs Relief [ER] on the sale? On the face of it, you would think not because one of the main rules of ER is that you must own the shares for 3 years. They wouldn’t own the shares in Newco for that long. But there is an out where there is a company reorganisation. This is where there is CGT relief at the shareholder level so that the shares in Newco are deemed to be the shares in TOL. This will ensure that the period of ownership and working rule carries over to the Newco. So, both will qualify for ER if they sell their shares.
| Sales Proceeds | Winnie | €600,000 |
| Tax Payable [ER] | 10% | €60,000 |
| Net after tax | €540,000 |
Bryn will have the same CGT to pay, so under this option, they will get a net amount of €1.08 million into their hands. They will still own TOL with the property in it. For more information on ER see here
Hive out the Property
Another option is to hive out the property from TOL to a new company. Bryn and Winnie could set up a holding company that sits above TOL. They would swap their shares in TOL for new shares in Holdco. So, they would own shares in Holdco and Holdco would own shares in TOL. They could then hive up the property to Holdco so that it owns the property as well as the shares in TOL. We need to make sure there is no stamp duty cost here and use the reliefs available. Stamp Duty at 1% [remember it is a residential property] is €10,000. To get the Stamp Duty relief
- Holdco must own at least 90% of TOL which it will and
- Holdco must hold the shares for 2 years
Number 1 is ok but number 2 is not. There will be a clawback of Stamp Duty if Holdco sells the shares in TOL within 2 years of the property transfer. In this case, there would be no point in claiming the stamp relief in the first place. The intention is for Holdco to sell the shares
While this option can be very viable in certain circumstances it isn’t in this case. If Holdco sells the shares in TOL
- it will pay 33% on the gain and there is no ER
- The cash and property are in holdco
- No cash in the hands of Bryn or Winnie
Summary
Option 1 of the company selling the assets or option 2 of hiving out the trade looks most attractive. With Option 1 we need to see what we can do to get the money into the hands of the Wynn Jones. On a sale there are many taxes to consider with Capital Gains Tax, Stamp Duty, Vat & Corporation Tax to the fore. What people want and their circumstances are always different. The purchaser’s interests must also be considered. Do they want to buy assets or shares and are they prepared to buy the history of a company they don’t know a lot about? Stay tuned for next week. We will see what a very attractive solution looks like for Bryn and Winnie
Interested in talking to us? Call Deirdre on 051396703 or start here. Tell us a bit about you and your business and we will see if we can help.
