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New queries, issue 4299

05 April 2011
Issue: 4299 / Categories: Forum & Feedback
Reorganising a Scottish partnership; entrepreneurs’ relief on disposal of business premises; wife’s pension; winding up business owned by siblings

Scottish share-out

We act for a (Scottish) professional partnership which comprises ten partners. The partnership owns all the shares of a trading company. The trading company has two employed ‘executive’ directors, and two of the partnership’s partners act as ‘non-executive’ directors, sitting on the board to safeguard the partnership’s interest in the company.

Although there is no immediate prospect of the company being sold, it strikes us that this structure is not particularly efficient for entrepreneurs’ relief purposes, because there are only two partners who have been formally appointed as directors; the remaining eight are neither directors nor employees.

Our thoughts on improving the structure are as follows.

First, transfer an equal number of shares out of the name of the partnership and into each individual partner’s name. Each partner would then own 10% of the company’s share capital outright, so meeting the 5% condition for entrepreneurs’ relief.

As a Scottish partnership is a separate entity from its partners, we thought this safest, though readers may consider it unnecessary.

Second, appoint all the remaining partners as directors of the company.

Though we are reasonably comfortable that the transfer of the shares from the name of the partnership into the names of each individual partner does not, in itself, give rise to any tax implications, we are concerned that the appointment of the remaining eight partners as directors, coupled with the transfer of those shares, could give rise to an income tax charge based on their value.

We guess, though, that this will depend on whether the partners are already regarded as owning the shares, for income tax purposes, by virtue of being partners of the partnership.

Readers’ thoughts on this, and on any other tax implications that we may have overlooked, would be appreciated.

Query 17,784 – Shared-out

Restricted relief?

I have just acquired a new client, a married sole trader who operates a general retail store from trading premises which are occupied for the purpose of the trade, but jointly owned by the trader and his wife.

Although his wife is employed in the business, she is not and never has been a part-owner of the business. The couple are now intending to sell the trade and – some time after disposal of the trade – plan to make a separate disposal of the premises from which the trade is operated.

Under the terms of TCGA 1992, s 169I(2)(b) and (4) there appears to be an extension to entrepreneurs’ relief where an asset used for the purpose of the trade is sold within three years of the disposal of the trade itself.

However, in this case, and which I am sure must be a fairly common occurrence, the trading premises are owned jointly by husband and wife, whereas the trade is operated solely by the husband, albeit with the wife as an employee.

It is my understanding, therefore, that entrepreneurs’ relief on future disposal of the trading premises, assuming the other conditions are met, will only extend to 50% of the capital gain arising thereon.

Readers’ comments would be very much appreciated.

Query 17,785 – FiftyFifty

Another pension

I was looking forward to reading the responses to the Readers’ Forum query Spouse’s pension by Prudence, as I have a number of clients in a similar position.

In short, I have been wondering whether a company can justify paying pension contributions to the spouse of an employee as part of that employee’s overall remuneration strategy.

For example, for a senior employee whose salary package could be worth up to £150,000 per annum, from a ‘wholly and exclusively’ perspective, I see no difficulty in the employee receiving a package of £100,000 and the spouse receiving benefits worth up to £50,000. In the ordinary way, this would all be assessable on the employee under normal principles.

However, what is the position if the spouse’s package included (to a greater or lesser extent) pension contributions? Would the new £50,000 allowance allow this to be a further tax-free benefit?

Or would it somehow eat into the employee’s annual allowance? Or is there something that would stop this from qualifying for a trading deduction?

Query 17,786 – Constance

Sibling rivalry

My clients are a brother and sister who trade as a marketing business through a limited company. Ms A has 51% of the shares while Mr B has 49%.

Basically, the company is reliant on the joint efforts of the two director/shareholders who each have their own specialist activities within the business; however, they have decided to part company.

Ms A is not really in a position to personally buy Mr B’s shares, but there are undistributed profits within the company and she was wondering whether this might be a case for a company purchase of own shares.

In such a case, presumably the company and shares will need to be valued, although Mr B will be taking his own clients with him so this will have to be taken into account.

An alternative idea was that both could simply set up their own businesses and wind up the existing company.

Can readers provide a summary of the tax (or other) advantages and disadvantages of each approach. If there are any other suggestions in such circumstances I would also be interested.

Query 17,787 – Market Man

Issue: 4299 / Categories: Forum & Feedback
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