Avoid an expensive exit by taking the right route
issues arises where a company retains more cash than is needed to cover short-term liabilities. The passive holding of cash is not a trading activity and where such cash reserves equal 20% or more of a company’s net assets HMRC may seek to deny ER on the sale of the company’s shares.
If a company is the holding company of a group, then it is the group’s activity as a whole that determines whether shares in the holding company qualify for ER.
If non-trading subsidiaries form part of a corporate group this can potentially render the whole group ineligible for ER. Therefore holding an investment company, such as a property rental business, in an active trading group can create tax issues on exit.
Even if a company is a qualifying company for ER this doesn’t mean every shareholder will obtain relief. To qualify for ER on the disposal of their shares an individual must hold at least 5% of the ordinary share capital, have voting rights and be an employee or director of the company. These conditions need to be met for a year before sale.
Issues arise where for example:
•Shares have been given to family members who have no involvement in the trade
•Some share classes are non-voting
•Shareholdings have been eroded below 5% by subsequent share issues
Some conditions need to be met 12 months prior to sale therefore it is important to regularly review a company’s position to obtain assurance with regard to ER on exit. A company’s non-trading activity can also negatively impact on eligibility for Business Property Relief resulting in all or part of the value of its shares being chargeable to Inheritance Tax in a shareholder’s estate.
Should an issue be identified, there are various restructuring options available to separate nonqualifying activities from a trade or remove excess cash. Which route is most appropriate will depend on a business’s particular circumstances and should be discussed with a professional tax adviser.
Contact John.Gold@ campbelldallas.co.uk or call 01786 460 030 for more information.
It is important to regularly review a company’s position to obtain assurance with regard to ER on exit