Recent times have been difficult for many businesses due to COVID-19, whilst others are doing fantastically well, despite the current challenging circumstances. The last year has made business leaders think carefully about their business risks and whether their current structure is actually ‘fit for purpose’. It may be the time, over the next few months, to put a new structure in place that will assist in growing your business, whilst mitigating the risks of a future downturn.
Risk of properties and trade in the same company
Hazlewoods has helped a number of clients move their property assets out of their existing trading company. The risk is if there was a downturn in trade which resulted in, for example, a significant supplier not being paid, they may seek to claim their debts by pursuing a claim against the assets of the company. This could result in a property potentially having to be sold (and at a ‘fire sale’ price), in order to pay this outstanding debt. It may be possible to mitigate this risk by moving the property into a new holding company that sits above the current trading company. Clearly, there are tax issues involved (and potential commercial issues if a bank has security over the property) in introducing a new holding company but, in our experience, it should be possible to carry out this exercise tax-free.
Different businesses in the same company
Sometimes a company will have set up separate businesses/trades over time, which may be run by the same or a different management team in the company. One may be valuable whilst another may not, or it may be desirable to sell one of the businesses before the other. A company selling one of its businesses whilst retaining another can be very tax-inefficient and commercially more difficult Furthermore, in a similar situation to the potential separation of property, there is also a risk that if one of the businesses fails, then this could adversely impact on the valuable business.
It is possible to restructure the company by moving out one of the businesses, in a tax-efficient manner, into a new company formed for that purpose (and this could also be carried out at the same time as moving the property as discussed above).
There can also be significant tax and commercial advantages of carrying out what is known as a ‘demerger’, so the individual businesses (whether they are trading or investment businesses) become held directly by the individual shareholders. Care needs to be taken to carry out the restructuring in the correct way, to avoid falling into tax traps.
Create a new group structure
There are other instances where the shareholders may wish to consider bringing companies together within a group, as this can enable tax losses to be offset between the companies in the future and allow tax efficient transfers of assets around the group. If a company joining the group is valuable, there will be tax implications on the transfer of ownership of the shares which would need to be considered.
Solvent liquidation of a company
If a company has sold its business, or ceased to trade, then it can often be worthwhile to carry out what is known as a ‘members’ voluntary liquidation’ , to distribute the remaining assets (often significant cash balances) of the company. By distributing the funds in this way, they are treated as ‘capital’ so there are likely to be significant tax benefits compared with taking the funds out as dividends or salary. However, this option needs to be considered carefully since if the shareholder(s) are going to continue with a similar business in the future, the potential tax benefits of this route may be eradicated.
Hopefully, the above gives you a flavour of some of the options for restructuring your business to mitigate risk and create additional value. The potential tax implications of carrying out such restructuring need to be considered and the tax cost of doing things the wrong way can be significant We will ensure that any restructuring fits with your commercial requirements whilst being carried out tax efficiently.