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We act for two companies which originally had very different shareholders but are now owned by the same two shareholders, each having 50 per cent. Both companies operate in the same industry and commercially it would make sense to combine the two operations.
We act for two companies which originally had very different shareholders but are now owned by the same two shareholders, each having 50 per cent. Both companies operate in the same industry and commercially it would make sense to combine the two operations.
The companies have traded profitably for many years and, through adopting a zero dividend strategy, have built up considerable cash deposits and short-term assets. The cash and liquid assets now produce 8 to 10 per cent of each company's income, but represent 40 to 50 per cent of the net asset value of the companies.
Our intention is to combine the two companies to form a group, after which all the trade will be transferred to a single company (the parent) and the other company (the subsidiary) will become dormant and be wound up. This should produce annual administrative cost savings and make the combined businesses more attractive to a trade purchaser in the future.
We have three concerns:
* Will the cash and liquid assets of the company being sold to form the group be likely to taint the company for the purposes of business taper relief for inheritance tax purposes? If readers consider that the companies are 'tainted' for this purpose, strategies for 'cleaning' these companies would be greatly appreciated.
* Is the Revenue likely to refuse clearance under section 707, Taxes Act 1988 on the grounds that the capital gains tax liability, assuming business asset taper relief is available, would be less than the higher rate tax on a distribution of profits (see Cleary v Commissioners of Inland Revenue 44 TC 399)?
* As the proposed transaction is between connected parties, and is likely to involve Shares Valuation Division, should the amount of consideration for the share disposal be stated as equal to our valuation of the shares, or should it be 'such amount as may be agreed with Shares Valuation Division as being the market value'?
(Query T15,791) – Combine Harvester.
It is presumed that 'Combine Harvester' intends the grouping to be undertaken by way of a payment of cash from 'Holdings' to the shareholders of 'Target', which puts matters straight into the facts of Commissioners of Inland Revenue v Cleary 44 TC 399. It is possible clearance may be given, but this is thought unlikely. If it is probable that clearance will be refused then, in my view, no application should be made. In the era of self assessment a taxpayer reviews the facts and completes his return accordingly. If his conclusion is that the sale of shares in Target is a capital gain, then he completes the return accordingly. It is then up to the Inland Revenue to challenge if it believes entries on the return require explanation.
The more usual method of creating a group would be to effect a share for share exchange with clearances being obtained under both section 707, Taxes Act 1988 and section 137, Taxation of Chargeable Gains Act 1992. In my experience, even though there may be substantial cash balances in Target, a clearance application will not be refused. If 'Combine Harvester's' clients have adopted a policy of zero dividends, then it seems curious they should now volunteer tax by effecting the group on a cash payment basis.
Certainly if 'Combine Harvester' were persuaded that the cash route was to be adopted then it would be appropriate to include within any contract/agreement an adjuster clause. Thus the payment for the shares could be £x or such greater or lesser sum as was agreed as the open market value in negotiations with Shares Valuation Division. Such a clause would not be effective for stamp duty but should, at least, ensure the relevant section 707 assessment matches the cash received. The adjuster clause would be used to avoid a situation where too much has been paid for the shares perhaps with the result that in addition to a section 707 assessment there may be beneficial loan implications with section 419, Taxes Act 1988 applying.
Where any company has surplus cash then, potentially, some inheritance tax relief may be restricted. The cases of Exors of Brown v Commissioners of Inland Revenue (SpC83 – 1996) and Barclays Bank Trust Co v Commissioners of Inland Revenue (SpC158 – 1998) show the areas that need to be addressed. It is essential to show that cash is being accumulated for a particular purpose, not simply because dividends have not been paid. Thus in the case of a farming business, it might be permissible to accumulate cash in order to purchase additional farmland provided there was a clear intention that this would happen. If, for example, there was an agreement to buy a neighbour's farm, then cash accumulation is for business purposes. This could be confirmed by, in the meantime, buying smaller pieces of land as they became available as part of an expansion programme. However, simply holding cash without any clear plan, perhaps with the vague view that expansion was a 'good idea' but without giving effect to those ideas, would not allow the cash surpluses to be eligible for inheritance tax relief. – Flipper.
The plan involves selling one of the companies (the intended subsidiary) to the other (the intended parent) for shares in the parent. In other words, the clients will realise the sold company incurring capital gains tax liabilities accordingly. Hence the concern with non-trading assets in the sold unit. Surely it would be simpler to fuse the companies directly, by forming a new and adequately capitalised company to assume the trade and assets of the existing ones, while the latter are liquidated (or demounted) and struck off, all in one operation.
The clients will receive shares in the new company, replacing, and in the same ratio as, those now held. It will be paper for paper, a classical reconstruction without change of ownership, and advance clearance under section 707, Taxes Act 1988 should be readily forthcoming. The opportunity might well be taken to have the assets valued, in order to ensure accurate capitalisation.
Any future inheritance tax problems anticipated from the non-business assets can then be addressed at leisure, by finding tax-efficient ways to extract those assets from the company and either realise them or put them in the clients' names. – Man of Kent.
