Transferring property assets out of a company tax efficiently
A common scenario is for a company to hold both trading and investment assets. This could be because the shareholders have decided to use retained cash in the company to purchase investment properties or other investment assets (in the belief that this saves on the tax charge on extracting funds from the company). Alternatively it may simply be the case that assets that were previously used for trading purposes (eg property) are now held as an investment.
This is usually fine until you start to think about the future disposal of either the property or the trade.
Taking a disposal of the trade, there would usually be no problem with this and the shareholders could consider a sale of the shares in the company. This can be very tax efficient and business assets taper relief will often reduce the effective tax rate to 10% if a disposal is before 5 April 2008. After April 2008 a gain on the sale of shares would be taxed at 18%.
However many purchasers will not want to buy a company complete with the property investment assets, and you would therefore need to think about extracting these from the company prior to a disposal. In addition, having an investment asset in the company that is 'substantial' could prevent business asset status from applying and the effective CGT rate could be increased to 24% for a disposal before 5 April 2008.
It is usually therefore advised to separate the investment from the trading activities. How you actually do this without paying a fortune in tax though is another question.
A simple transfer of the property from the company to the shareholders or another company would be a disposal by the original company. As such a gain would arise based on the market value of the property (usually). If the shareholders are UK resident the transfer at undervalue would also be taxed on them as though they had received a dividend. This would then be subject to income tax on the element of undervalue.
So all in all this is not really a good option.
Another option which may be preferable could be to consider a demerging of the existing company, with the separation of the trading and the investment activities. There are specific tax provisions that provide for CGT reliefs on a demerger applicable to trading companies or the insolvency act could be used. The existing trading company could probably be liquidated during this process, and the assets split into newco's.
Under this the existing company is placed in liquidation and in essence the liquidator transfers the assets to newcos established by the shareholders, in exchange for the issue of shares to the shareholders(eg X Ltd & YLtd).
They could then dispose of the shares in X Ltd directly without the need to crystalize a gain on Y Ltd. This treatment can also apply for investment assets and the shares in X and Y Ltd would be treated as being owned for the same holding period as the existing trading company.
Therefore Newco X could receive the Investment property and Newco Y could receive the trading assets. The newcos would remain owned by the existing shareholders and they could then sell the trading company separately from the investment asset/company. Note that these are all complex areas and should be looked at in some significant detail.
In terms of stamp duty if the shareholding proportions will be the same as they were for the current company (ie the owners would have exactly the same percentage shareholdings in X Ltd as they currently have in the trading company) it should be possible to avoid stamp duty on this transfer, although the anti avoidance provisions would need to be reviewed in detail.
The shareholders could then dispose of the shares in X Ltd or Y Ltd. A gain would arise with a pre April 2008 disposal qualifying for taper relief and an 18% CGT rate after this. This would still represent a significant tax saving in many cases when compared with a company disposal of assets (although clearly the specific facts would need to be considered eg the base cost of shares/assets, any capital losses etc).
Therefore if you're looking at splitting an existing trading company a demerger could be considered. Note that ideally this should be done a significant period before a disposal of the shares to a third party purchaser, although if necessary the liquidation route may be considered for disposals shortly after the reorganisation.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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