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Replies to Queries - 4 - Taperly ever after

26 June 2002
Issue: 3863 / Categories:

Please would readers clarify the position where a husband and wife are 100 per cent shareholding directors of a holding company. The accounts show that the company has the following assets:

* cash and insurance bond of £400,000;

* 100 per cent shareholding in a property investment company; and

* 100 per cent shareholding in a trading company that has an average pre-tax profit of £50,000 or less and nominal assets.

Please would readers clarify the position where a husband and wife are 100 per cent shareholding directors of a holding company. The accounts show that the company has the following assets:

* cash and insurance bond of £400,000;

* 100 per cent shareholding in a property investment company; and

* 100 per cent shareholding in a trading company that has an average pre-tax profit of £50,000 or less and nominal assets.

If the directors decide to retire, can they liquidate all assets, wind up the companies and distribute the cash proceeds to themselves, enjoying a maximum taper relief of 75 per cent of the total distribution?

All the companies were in existence before April 1998 and the directors are both over 50.

(Query T16,031) - Taperman.

 

It seems unlikely that higher taper relief would be available. Paragraph 6(1) of Schedule A1 to the Taxation of Chargeable Gains Act 1992 identifies as a qualifying company one which is a holding company of a trading group. A holding company means a company whose business (disregarding any trade carried on by it) consists wholly or mainly of the holding of shares in one or more companies which are its 51 per cent subsidiaries. A trading group means a group of companies of which (if all the activities of the companies in the group are taken together) do not, or do not to any substantial extent, include activities carried on otherwise than in the course of or for the purposes of a trade.

'Taperman' should analyse the activities of the property investment company by comparing and contrasting them with those of the trading company. It is generally thought that a critical line is drawn whenever unacceptable activities are found on a scale exceeding 20 per cent of those directed to trade.

Next, does the £400,000 cash and insurance value prevent the holding company from having a business mainly represented by its shareholding? The purposive test for a trading company would make it of doubtful use to relocate assets into the trading subsidiary.

Perhaps the directors might seek an exchange of shares for the paper of a financial institution, to obtain a forward spread of income and gains. - Elder.

 

Clause 46 of the current Finance Bill is headed 'Taper relief: minor amendments', leading one to believe that nothing of great moment is to be found in it. In fact what the clause does is to introduce Schedule 10 and there are a whole raft of changes in the Schedule to various definitions applicable for taper relief purposes. The Notes on Clauses state that each change 'is not intended to alter the substance of the existing definition', although it is difficult to see that wholesale redrafting of core definitions in the legislation can have such a limited effect.

In order to qualify for full business asset taper relief, the husband and wife shareholders must now satisfy the tests in the new Schedule for holding company of a trading group. There is little doubt that the company in question here would not have been a holding company under the previous definition, but there is every likelihood that it will be under the new one, which is that it must simply be a company that has one or more 51 per cent subsidiaries. So much for the 'minor amendments' tag attached to Schedule 10 in the Bill.

The new definition of 'trading group' requires one or more members to be carrying on trading activities and also the activities of all the group members, taken together, must not include to a substantial extent activities other than trading activities. The fly in the ointment here is the property investment company and, unless it holds the property for use by the trading company, it seems very likely that the existence of this subsidiary in the group will end all hopes of business asset taper relief.

If the property is held for the purposes of the trading company, then the remaining problem is the cash and insurance bond in the holding company and it will be necessary to establish whether or not the insurance bond amounts to more than 20 per cent of the total group assets. The cash itself may not be a worry if it can be shown to be required for the overall activities of the group.

Can any improvements to the position be carried out? Assuming that the clients do not want to go in for artificial schemes or exotic plans, consideration could first be given to liquidating the insurance bond and paying a dividend out for the cash assets in the holding company. The effective rate of tax on a net dividend is 25 per cent which is broadly similar to the rate of capital gains tax on a non-business asset held for ten years.

A demerger of the trading company would be possible so long as it can be shown that the purpose of the demerger is not tax avoidance. Alternatively a reconstruction of the group might be possible in order to split the trading company off into separate direct ownership. Thanks to Mr Brown, only two further years of ownership are then required before the trading company can benefit from full business asset taper relief, although the shareholders must first restart their taper clock. One way of doing this might be to transfer the trading company shares into an interest in possession trust with holdover relief under section 165, Taxation of Chargeable Gains Act 1992.

What would then be left would be the property investment company within the holding company. Given the current stamp duty environment which favours shares as against other assets, there might be attractions to a potential purchaser of the property in acquiring the asset in its current corporate envelope. - Big Shot.

 

Extract from reply by 'Barham':

The asset is a group of companies (parent with two subsidiaries) and, as both clients are over 50, if any of the companies were owned, or were links in a series of businesses run for over ten years, and provided disposal precedes 6 April 2003, each client's share of the gain attracts retirement relief, at 100 per cent on up to £50,000 and at 50 per cent on up to £150,000 of any remainder. The order of relief is (a) indexation, (b) retirement and (c) taper.

The emperor Augustus Caesar is credited with saying 'The main qualification for a librarian is an orderly mind'. He could equally have been assessing our profession, as witness the details of this case. On liquidating the subsidiaries, gains or losses arise to the parent company.

To avoid trapping gains in the parent company, one idea would be to seek advance clearance from the Inland Revenue under section 138, Taxation of Chargeable Gains Act 1992 to reorganise the capital without change of ownership, whereby the group is separated into three companies held individually in the same ratio as the parent is now held. Commercial reasons for this must be found (which should not be too hard), and it should be done some time before the intended liquidation, so that the two events are not close enough to attract a challenge. They can then liquidate each company separately and, possibly in different tax years, optimise the personal exemptions. This is especially attractive if one company alone, or two of them together, if sold by 5 April 2003, will yield a gain of £400,000 to absorb the retirement relief of both clients.

Issue: 3863 / Categories:
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