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Advice is required on a company’s purchase of an investment property.
Our client owns all the shares in what is clearly a trading company for capital gains tax entrepreneurs’ relief. We understand that a cash holding will not normally have an adverse impact on this. The client wants to use £2.5m of the company’s cash to buy a building that is already let to an unconnected third party and is expected to remain so.
Our advice to the client is that this could result in HMRC taking the view that the company’s investment activity is ‘substantial’ when viewed in light of its trading activities (following HMRC’s 20% rule). Our client’s financial adviser suggests that the property should be bought by a new company which would receive an inter-company loan from the existing one.
How will HMRC regard the loan for the purposes of establishing whether the lender company is a trading company for entrepreneurs’ relief purposes?...
