Reply to: Connected companies loan

[ChimpMaster]

Isn't the main reason why people want to do what the bulk of this thread is about, is they want to avoid having to pay 32.5% or thereabouts in personal tax on big dividends to invest personally? Appreciate there might be some other reasons too, but thought this was the main one. Hence in your situation, if you're anticipating an MVL soon (so likely getting funds into your hands personally at just 10% tax), then does it not make sense to delay any big investments until post MVL, and buy personally?

If you need the funds personally, to make investments in your own name or even just to spend personally, then of course you are correct in that it is better to quit the IT business, MVL and then proceed. But if you don't need the funds personally, and instead want to invest in another area or another business and to grow it over time with retained profits, then a corporate structure is best.

HMRC have really messed up the investment landscape, and well, the entire tax landscape. It's so much more complicated now trying to work out the best way to do things.

[Maslins]

However, in my case I am looking to quit contracting within the next few years (sooner the better, it just isn't worth the hassle any more) so I want to liquidate the IT Co, claim ER and sail off into the sunset while my other investments/businesses tick along on the side.

Isn't the main reason why people want to do what the bulk of this thread is about, is they want to avoid having to pay 32.5% or thereabouts in personal tax on big dividends to invest personally? Appreciate there might be some other reasons too, but thought this was the main one. Hence in your situation, if you're anticipating an MVL soon (so likely getting funds into your hands personally at just 10% tax), then does it not make sense to delay any big investments until post MVL, and buy personally?

[jmann]

My preference would be to set up a holding company too. This is certainly better if you intend to continue contracting for the longer term while also investing in other businesses using funds from your main business (IT Co).

However, in my case I am looking to quit contracting within the next few years (sooner the better, it just isn't worth the hassle any more) so I want to liquidate the IT Co, claim ER and sail off into the sunset while my other investments/businesses tick along on the side.

It is a minefield in this utterly ridiculous tax system we have in the UK. So make sure you do things right from the beginning.

You are absoultely right. I got another 20+ years so I think holding company set up is better for me.

[ChimpMaster]

My initial plan was to simply set up an SPV company and loan the retained profit from the trading company. I have spoken to multiple tax advisors and they all come up with different solution. Last tax advisor told me it would be better to set up a holding company which would protect the assests and allow me to invest the money in other areas too. It will cost more since accounts need to be filed for 3 companies instead of 2.

My preference would be to set up a holding company too. This is certainly better if you intend to continue contracting for the longer term while also investing in other businesses using funds from your main business (IT Co).

However, in my case I am looking to quit contracting within the next few years (sooner the better, it just isn't worth the hassle any more) so I want to liquidate the IT Co, claim ER and sail off into the sunset while my other investments/businesses tick along on the side.

It is a minefield in this utterly ridiculous tax system we have in the UK. So make sure you do things right from the beginning.

[jmann]

What are you trying to set up and what do you have just now?

My initial plan was to simply set up an SPV company and loan the retained profit from the trading company. I have spoken to multiple tax advisors and they all come up with different solution. Last tax advisor told me it would be better to set up a holding company which would protect the assests and allow me to invest the money in other areas too. It will cost more since accounts need to be filed for 3 companies instead of 2.

[craigy1874]

Yes, with group structure you can end up costing £250-1000 per year in additional expense but I think it would be worth it in the long term. I guess it really depends on investment level.

I am hoping to go with holding company since I am looking into investing in other areas like stocks and shares. This is not possible with trading or spv company. It's more flexible but I guess you lose the entrepreneurs' relief since funds would be transferred to holding company.

The problem is finding a decent tax advisor who doesn't charge a fortune. I have been quoted between £3000-6000 to set up everything.

What are you trying to set up and what do you have just now?

[jmann]

Yes. The stipulation is that the loan+interest should not form a large block of the IT Co's business. 20% or less was the figure touted to me. The loan can be re-paid and liquidation progressed as normal. Or the loan written off so long as there is a majority shareholder.

The Group structure is interesting but this takes a lot more regulation, work and cost. I might look into this as a long term option. It would be interesting to see ILikeTax apply the DR rules to this though.

Yes, with group structure you can end up costing £250-1000 per year in additional expense but I think it would be worth it in the long term. I guess it really depends on investment level.

I am hoping to go with holding company since I am looking into investing in other areas like stocks and shares. This is not possible with trading or spv company. It's more flexible but I guess you lose the entrepreneurs' relief since funds would be transferred to holding company.

The problem is finding a decent tax advisor who doesn't charge a fortune. I have been quoted between £3000-6000 to set up everything.

[Iliketax]

It would be interesting to see ILikeTax apply the DR rules to this though.

There is no difference to the CCG whether or not there is a group structure (since B can only be the employer only with the CCG, another group company would still be a relevant third person).

While I don't care if you guys think that this is an issue or not, someone in the future might use this as a way of creating some sort of scheme that HMRC want to challenge and so then you get all sorts of risks of HMRC deciding that they want to take the point with you in a few years time. Out of interest, HMRC do think that this sort of investment can be used in a way that they have a problem with. See the last para here (and in this context settle could include a lending): EIM47235 - Employment Income Manual - HMRC internal manual - GOV.UK

[ChimpMaster]

Can the trading company still claim entrepreneurs' relief?

Wouldn't creating holding company and transferring retained profit make more sense since you don't have to worry about loan agreements? In the event trading or spv company runs into finanical trouble, it wouldn't affect the holding company. Maybe I am being over cautious.

Yes. The stipulation is that the loan+interest should not form a large block of the IT Co's business. 20% or less was the figure touted to me. The loan can be re-paid and liquidation progressed as normal. Or the loan written off so long as there is a majority shareholder.

The Group structure is interesting but this takes a lot more regulation, work and cost. I might look into this as a long term option. It would be interesting to see ILikeTax apply the DR rules to this though.

[ChimpMaster]

You will be fine. As I have said, there is nothing wrong with a company deciding to make an investment via another vehicle.

I don't see the need to charge interest either - its totally pointless as one pays tax and the other saves it.

Normally yes, there is no need to charge interest. Without divulging too much here online, in specific cases it can be considered helpful to have an "arm's length investment".

[jmann]

Can the trading company still claim entrepreneurs' relief?

Wouldn't creating holding company and transferring retained profit make more sense since you don't have to worry about loan agreements? In the event trading or spv company runs into finanical trouble, it wouldn't affect the holding company. Maybe I am being over cautious.

[craigy1874]

I didn't realise there was a problem that needing solving here! Though you tried hard to manufacture one

Anyway, I have spoken to 2 different CAs and one has discussed with his tax specialist and the other firm is going to review further with their specialist tax team. However, neither firm sees any problem with the proposed plan of an inter-company loan being used to make a business property investment within a SPV.

One accountancy advised to charge interest, to keep the loan at "arm's length", even though the tax output is a zero sum advantage to HMRC.

Long term plan still needs to be thought out. Either the SPV repays the loan or the loan is written off (with apparently a majority shareholding needed in both companies to do so), but I need to make sure I do things the right way.

You will be fine. As I have said, there is nothing wrong with a company deciding to make an investment via another vehicle.

I don't see the need to charge interest either - its totally pointless as one pays tax and the other saves it.

[ChimpMaster]

Sorry but there is no way buying a property through a limited company is disguised remuneration.

The property is owned by a legal entity and for it to end up in the name of the 'employee' they would have to buy it from the property company. You then have the issue of how to remove those funds from the property co.

You are taking the legislation you refer to wayyyyyyyyy too far!

Great. That's that one solved.

Out of interest, how do I know if I'm taking legislation wayyyyyyyyy too far?

I didn't realise there was a problem that needing solving here! Though you tried hard to manufacture one

Anyway, I have spoken to 2 different CAs and one has discussed with his tax specialist and the other firm is going to review further with their specialist tax team. However, neither firm sees any problem with the proposed plan of an inter-company loan being used to make a business property investment within a SPV.

One accountancy advised to charge interest, to keep the loan at "arm's length", even though the tax output is a zero sum advantage to HMRC.

Long term plan still needs to be thought out. Either the SPV repays the loan or the loan is written off (with apparently a majority shareholding needed in both companies to do so), but I need to make sure I do things the right way.

[craigy1874]

Great. That's that one solved.

Out of interest, how do I know if I'm taking legislation wayyyyyyyyy too far?

When you are talking about disguised remuneration as a result of a company making an investment!

Ridiculous!

[Iliketax]

Sorry but there is no way buying a property through a limited company is disguised remuneration.

The property is owned by a legal entity and for it to end up in the name of the 'employee' they would have to buy it from the property company. You then have the issue of how to remove those funds from the property co.

You are taking the legislation you refer to wayyyyyyyyy too far!

Great. That's that one solved.

Out of interest, how do I know if I'm taking legislation wayyyyyyyyy too far?