The planning of capital gains and inheritance tax is important when the disposal of a family business takes place. The biggest area that a professional advisor is asked to deal with during the planning of tax is the advice on tax efficient exit routes. This blog will cover the discussion of implications for key tax in the case of selling and passing on the family business or company and gives suggestion about useful planning tips to help in structuring the business in the best manner from the outset. The second part of the blog will highlight planning tactics for corporate growth and will look at a company as it starts its trading, obtains extra business, and expands itself. The last section of the blog discusses the commercial decisions that are taken by the shareholders of the company and the company itself at the different stages in the development of the company and provides a summary of the implications of tax of those decisions without which you will remain wondering upon how to set up a limited company UK effectively.
Planning of Capital Gains Tax (CGT)
A capital gain is likely to occur irrespective of the fact that whether the company or the business is to be sold or passed down to the next generation. Hence, it is important to maximize the reliefs available. The relief of entrepreneurs may particularly be valuable especially as the gains’ lifetime limit is £10 million.
Planning of Inheritance Tax
IHT is only considered where the company or family business is to be passed on to the next generation. An outright business sale to a third party does not consist of transfer of value for IHT.
A main question arises as to whether to wait till death or gift the assets now when a taxpayer wants to pass on his family business.
There may never be a liability of IHT if the assets are given during the lifetime, either because the gift is covered by BPR or because the PET does not become chargeable under the condition that the transferee is still the owner of it or other related property of business at the time of the death of the transferor.
At some point, a lifetime gift will be subject to CGT, either on the sale or on the transfer of assets by the transferee, making an assumption that a claim for gift relief is made.
However, a free uplift in the CGT base cost to the current market value may be received by a transfer of assets on death and any property of business is passed on with the advantage of 100% BPR.
In favor of the approach to hold the business property until death, there are strong arguments but other points should seriously be considered:
- The EIS relief of investment may defer the gain.
- Free uplift of CGT on the assets of business may be abolished in the future dependent on the fact that the taxation of such assets should either be done under the capital gains tax or under inheritance tax.
- The gain itself may be fairly low in any case if a business is hit by recession.
- BPR at 100% may not be around forever.
There are some other drawbacks of tax that can be avoided under the condition that their identification is done and are acted upon. The main areas under consideration are:
- Holding the assets such as premises of business, outside the company or partnership restrains BPR to a rate of only 50%. This is reduced to nil if the disposal of partnership or shares interest is done prior to the premises of business.
- Beware of the arrangements of the buy and sell which are a part of the Articles of Association or partnership or the arrangements of shareholder as BPR may be denied.
- It is important that the property remains a property of business for the following seven years where a lifetime gift is made and that the ownership or alternative business property is retained by the transferee in order to prevent a charge to IHT on a sudden death.
- It is important to make sure that a gift does not fall foul of the rules of reservation of benefit.
Repurchasing Own Shares
It may prove beneficial for the individuals to make a sale of the shares back to the issuing company in the form of repurchase of own shares. If the conditions are met, this will be considered as capital gain or as a distribution in other case. It may become important to make an alteration in the proposal if the distribution treatment is on priority in order to make sure that the conditions are not met.
Planning for the Growth of Capital
If you’re not well aware of the planning of tax and are not sure about the procedure than how to set up a limited company UK? At each stage of the life of a company from its beginning, through growth and the expansion in future, the strategies for the planning of tax should be adopted.
Upon starting a ltd company UK the setup might be initially small. One or more individuals will make use of their own funds or the funds borrowed for the purpose of starting a ltd company UK. Some shareholders may remain active in operating the company on a daily basis while others will be considered as passive investors expecting a return for their investment.
The following points should be taken under consideration:
- Can the shareholders acquire a tax relief for their investment? If the company is a close company, then the payment of interest made on the loan to invest in the company can be subtracted from the net income.
- Is the company a close company? This will have an impact on the rate of tax whose payment is made if the company does not run a trade, i.e. the main rate of corporation tax on a close investment company. Also, any benefits given to the participators that are considered as dividends or loans made to participators trigger a charge at 25% on the company.
- EIS income relief for tax may be available to small investors.
- Tax Level Paid on the Profits of Company: Small profits rate will be applicable to profits below the rate of £300,000 with a marginal relief for profits less than £1,500,000. The payment of profits made to employees result in the reduction of net profits but the dividends paid to shareholders do not reduce these profits.
- Losses suffered can be relieved by carry back up to 12 months if there are any profits to carry back against or carry forward against future profits of trading.
- The registration for VAT should also be taken into consideration.
Expansion of a Company in UK
By increasing its own activities or buying the activities of another business, a company can grow bigger. It can also expand by either setting up a subsidiary company or assuming those activities within itself.
The following points should be considered:
- In case of the formation of a group: group relief for losses, transfer of assets and planning of tax regarding asset groups in respect of capital gains and losses, VAT group registration.
- When a company gets the trade of another company, capital losses remain within the vendor company. Losses of trade will also remain within the vendor company until and unless the two companies are under one common ownership.
- Single company with no associates or group of companies. Number of associates has an effect on the profit limits of CT.
- As the growth of taxable total profits takes place, it may be required to consider the payment of CT and VAT in instalments of a large company.
Expansion of a Company Abroad
As the growth of a company can be seen, it may consider to expand itself abroad. Similarly, there is also the chance of establishment of offshore company formation UK.
The implications of the tax of foreign business or offshore company formation UK are dependent on the legal structure used. From the viewpoint of tax, there exist two different ways for the establishment of a business:
- Its ownership could be held by the UK company. According to this option, it would be considered as an overseas PE of a company residing in the UK.
- In order to acquire the business, the UK company could incorporate a new subsidiary in the foreign country. According to this option, it would be considered as an overseas subsidiary of a company residing in the UK.
The following points should be taken under consideration:
- Foreign Permanent Establishment (PE): A permanent establishment is not a distinct legal entity but it is an extension of the company that owns it. The losses or profits of the PE belong to the company directly. Any loss of trade could be offset by the UK company or group against its income and gains of that year under the condition that the UK controls the PE. This will result in the reduction of the UK corporation tax liability of the company. The company owing the PE will be subject to foreign corporation tax on the PE profits once the PE is profitable, because it is conducting its trade within the boundaries of the foreign country from a PE. The profits will also be made subject to the corporation tax of United Kingdom as a company residing in the UK has to make the payment of tax on its worldwide income and gains. However, the corporation tax liability of UK, in respect of the profits of PE, will be relieved by double tax relief. A company in UK may make an election to exclude the losses and profits of all its foreign PEs from the corporation tax of UK. The election means that the taxation of profits of PE is also done overseas, but the election will not allow overseas PEs or loss relief against UK profits. Once the election has been made, it should be applicable to all of the PEs of UK company and its should be irreversible, so it is important to take into consideration the fact that whether future PEs are likely to make a loss. Double tax account must also be brought under consideration while making the decision that whether the election should be made or not. If the DTR operation means that there is no payable UK corporation tax, or a less amount of payable tax on foreign profits, it may be a better choice not to make the election, and keep relief of loss available in the upcoming periods of accounting.
- Overseas Subsidiary: A subsidiary is considered to be a distinct legal entity. A company incorporated in a foreign country will reside in that country for the purposes of tax, under the condition that its management and control is not done from the UK. Then, its losses or profits will be subject to the tax regime of the foreign country. Any losses of trade of the year would be carried forward and subtracted from the future trading profits of the company occurring out of the same trade. Once the company becomes profitable, it will then be subject to tax in the foreign country. Any payment of the dividends made to the parent company of UK will normally be excluded from the corporation tax. Usually, it is advised that the usage of a PE should be made where a foreign enterprise is expected to commit initial losses. This strategy lets the losses to be offset against any other profits of the company as long as the election of exemption is not made. Once the PE is profitable, it can be incorporated. However, a careful consideration should be made of the specific facts of the situation. For the purpose of determining the paid rate of tax by the companies, a subsidiary is an associate, whereas a PE is not. In a similar manner, the usage of a subsidiary instead of a PE could result in the increment of the rate of corporation tax as paid by the companies in UK.