There are several reasons why you may need to change your corporate structure, usually either in terms of asset protection or in anticipation of a future exit plan.
Restructuring your business needs to be done carefully and precisely to avoid running into any unwanted tax charges (be that Income Tax, Capital Gains Tax, Corporation Tax or Stamp Taxes), and often it is not possible to restructure tax efficiently if a business sale or exit is about to happen.
It is therefore a good idea to review your business structure periodically, so that any changes can be made well in advance of any possible sales or acquisitions.
Holding company structure
One of the most common reasons why a restructure may be desirable include the separation of valuable assets from the trade – for example, large surplus cash balances or properties. Having such assets in a holding company can provide a degree of protection should the trading business take a bit of a downturn.
In addition, should you wish to sell the trading business in the future, having that in a subsidiary means you have the possibility of selling the shares in the trading company, retaining the holding company after the sale.
A simple holding company structure is less desirable if, for example, you are separating a property which you wish to retain in the longer term. This is because, with a simple holding company structure, your sale proceeds of the trading company would be tied up in the holding company, meaning you may need to pay higher rates of Income Tax on dividends to extract the sale proceeds.
In such situations a demerger transaction can be considered, which separates the holding company with those valuable assets completely from the trading company.
Enterprise Management Incentives (EMI)
Another reason to consider a demerger is if you want to reward key employees with share options in the trading company, but don’t want them to have an interest in the property assets. Tax efficient share option schemes such as EMI are only effective if they are in the holding company – so the complete separation provided by a demerger puts the business in the best position to be able to use this mechanism.
Management Buy Out (MBO) and Company Purchase of Own Shares (CPOS)
Other scenarios include MBO transactions (and its variants such as Management Buy In) or the exit of only one or more shareholders. A CPOS transaction is often useful in this scenario, but the requirements to be able to carry this out and to obtain Capital Gains Tax treatment for the seller are quite stringent and as such this is not always the best option. The use of a new holding company with a share exchange for the continuing shareholders often provides the best solution in tax terms.
These are just a few examples of the kinds of restructure that we commonly help our clients with. The tax implications are not straightforward to navigate, and most of these transactions have an advance clearance procedure with HMRC to follow, which provides certainty on the available tax exemptions before carrying out the restructure.
We have helped many companies in this area, but the key message to take away here is that you should not wait until you are looking to exit before considering your options, as HMRC will usually not clear transactions that are because of an immediately prospective sale – because they consider that the main purpose of the restructure at that late stage is the reduction or avoidance of taxation.
For more information on business structure, or to arrange a free advice clinic of up to one hour to discuss your situation, please contact James Geary by emailing james.geary@randall-payne.co.uk or call 01242 776000.
James Geary has assisted me with planning a number of corporate restructures both for my business and for a few of my clients. He has the ability to consider the goals of all concerned to come up with a solution which not only works for everyone, but maintains tax efficiency and has always managed to secure the necessary advance clearance from HMRC without any hiccups. Very responsive and thoroughly recommended.
James England, Director
