Question re Accounting Treatment
Discussion
This is a hypothetical (at this stage), so the 'get an accountant' advice is not yet pertinent.
Company A owns 100% of the shares in company B.
A private individual buys the entire shareholding of company B. 100 shares, 500 goodwill, 1000 SAV.
What entries (if any) are made in the books of company B to reflect this? Is he buying the shares of B, or is he giving B the money to buy its own shares, which B then gives to him?
If the individual made the purchse through another company (X), then he could have a Director's loan to company X, but the same question applies; what entries would be made in B's books to reflect the purchase?
Company A owns 100% of the shares in company B.
A private individual buys the entire shareholding of company B. 100 shares, 500 goodwill, 1000 SAV.
What entries (if any) are made in the books of company B to reflect this? Is he buying the shares of B, or is he giving B the money to buy its own shares, which B then gives to him?
If the individual made the purchse through another company (X), then he could have a Director's loan to company X, but the same question applies; what entries would be made in B's books to reflect the purchase?
B is just being bought. It makes no difference to B who owns it, or what price has been paid (at least under UK GAAP - US GAAP lets you put acquisition cost into the acquired entities books which is mental).
Think about it another way; you have a mortgage for £100k with Santander. Santander gets bought by HSBC for a ton of money which implictly values your mortgage at £120k. Do you owe HSBC £120k?
ETA: There will be a couple of entries in the books of A. Exactly what these are depend on how B is sold, for how much, etc etc etc.
Think about it another way; you have a mortgage for £100k with Santander. Santander gets bought by HSBC for a ton of money which implictly values your mortgage at £120k. Do you owe HSBC £120k?
ETA: There will be a couple of entries in the books of A. Exactly what these are depend on how B is sold, for how much, etc etc etc.
Shirt587 said:
B is just being bought. It makes no difference to B who owns it, or what price has been paid (at least under UK GAAP - US GAAP lets you put acquisition cost into the acquired entities books which is mental).
Think about it another way; you have a mortgage for £100k with Santander. Santander gets bought by HSBC for a ton of money which implictly values your mortgage at £120k. Do you owe HSBC £120k?
ETA: There will be a couple of entries in the books of A. Exactly what these are depend on how B is sold, for how much, etc etc etc.
Thanks, that's what I thought Think about it another way; you have a mortgage for £100k with Santander. Santander gets bought by HSBC for a ton of money which implictly values your mortgage at £120k. Do you owe HSBC £120k?
ETA: There will be a couple of entries in the books of A. Exactly what these are depend on how B is sold, for how much, etc etc etc.
The question came about following a discussion on how the money used to buy the company could be treated as a Director's loan, and therefore withdrawn from the business at a later date with no tax liability.
If company X bought B, then there'd be entries in X's books - Investments in subsidiaries as an asset, and Director's loan (because the Director put up the money) as the liability. Then any profits B made would be X's profits (as the parent), and could, presumably, be taken out as loan repayments as and when appropriate?
I set up a Holding Company to do similar, instead of using my money to buy shares in company A I set up company B and lent it some money, company B used that money to buy company A, over time company A paid dividends to company B which repaid my loan. So I got my initial investment back, nothing tied up, no tax paid. This was advised and set up by my then accountants, all above board and legit, the only downside is having to file two sets of accounts each year.
RYH64E said:
I set up a Holding Company to do similar, instead of using my money to buy shares in company A I set up company B and lent it some money, company B used that money to buy company A, over time company A paid dividends to company B which repaid my loan. So I got my initial investment back, nothing tied up, no tax paid. This was advised and set up by my then accountants, all above board and legit, the only downside is having to file two sets of accounts each year.
I have to say, I couldn't see why that wouldn't work. Thanks 
RYH64E said:
I set up a Holding Company to do similar, instead of using my money to buy shares in company A I set up company B and lent it some money, company B used that money to buy company A, over time company A paid dividends to company B which repaid my loan. So I got my initial investment back, nothing tied up, no tax paid. This was advised and set up by my then accountants, all above board and legit, the only downside is having to file two sets of accounts each year.
Possible downside is the CGT position when it comes to sell A - if ever?RYH64E said:
Capital gains would be payable on disposal either way, but with entrepreneur's tax relief it's only 10%. There's nothing to pay prior to selling up.
Oh, I know that, thanks. It was the reference to CGT (and the assumption that you were talking about full-rate CGT) that threw me.Doofus said:
Why CGT? Holding company sells A, makes profit, pays corp tax. Holding company pays divi.
I was thinking the Company A pays corp tax on the gain at 19/20%, you pay income tax on the dividend. Compared with getting Entrepreneur relief + annual allowance if you had held A shares personally.TBH, the sale bit is irrelevant. I've had (and sold) one or two companies in the past - never as an individual, always through a parent company, but this hypothetical conversation arose from a discusson regarding a possible purchase which would represent a lifestyle, semi-retirement opportunity. I'd not be looking to sell; just install staff (in the fulness of time), and gain a residual income myself.
Re the original accounting, no entries would be made in B's books.
Re the subsequent discussion about funding, loans or equity, and holding company or not:
Loans/equity
It makes no difference to the eventual tax paid. Whether there is a loan or equity merely impacts how easy it is to get the "investment" out of the company, but both can be done tax free.
The capital gains position is exactly the same. Eg if the intitial investement were £100, and the company was sold for £1,000 the position is as follows:
If the initial investment is a loan - repayment of loan of £100 (tax free), capital gain of £900, subject to tax in the normal way. ER may or may not apply.
If the initial investment is share capital - gain of £900 (£1,000 less tax basis of £100), ie identical.
Holding company or not
Having a holding company can only make the base position worse. As an example:
A set up with £100 of share capital, which it uses to set up a wholly owned subsidiary B, which is the company carrying on the business. If the exit is by way of a sale of B by A, using the numbers above, A would make a gain of £900 and pay tax of £180 if Substantial Shareholding Exemption did not apply. This means that only £820 would be "distributed" to the shareholder on the winding up of A, compared to £1000 without a holding company.
If the exit was to be by way of a sale of A, the shareholder would be in the same position as not having a holding company, ie £1000 "distributed".
On an ongoing basis, if exit is not envisaged, having a holding company should make no difference to dividends coming out to the shareholder and their tax treatment (dividends between UK companies are not taxable).
So overall, I can't see what having a holding comapny achieves in this scenario.
Re the subsequent discussion about funding, loans or equity, and holding company or not:
Loans/equity
It makes no difference to the eventual tax paid. Whether there is a loan or equity merely impacts how easy it is to get the "investment" out of the company, but both can be done tax free.
The capital gains position is exactly the same. Eg if the intitial investement were £100, and the company was sold for £1,000 the position is as follows:
If the initial investment is a loan - repayment of loan of £100 (tax free), capital gain of £900, subject to tax in the normal way. ER may or may not apply.
If the initial investment is share capital - gain of £900 (£1,000 less tax basis of £100), ie identical.
Holding company or not
Having a holding company can only make the base position worse. As an example:
A set up with £100 of share capital, which it uses to set up a wholly owned subsidiary B, which is the company carrying on the business. If the exit is by way of a sale of B by A, using the numbers above, A would make a gain of £900 and pay tax of £180 if Substantial Shareholding Exemption did not apply. This means that only £820 would be "distributed" to the shareholder on the winding up of A, compared to £1000 without a holding company.
If the exit was to be by way of a sale of A, the shareholder would be in the same position as not having a holding company, ie £1000 "distributed".
On an ongoing basis, if exit is not envisaged, having a holding company should make no difference to dividends coming out to the shareholder and their tax treatment (dividends between UK companies are not taxable).
So overall, I can't see what having a holding comapny achieves in this scenario.
Alpinestars said:
So overall, I can't see what having a holding comapny achieves in this scenario.
In my case I had the choice of buying shares with a few hundred thousand pounds of my own tax paid money and owning shares in a small company, shares that weren't easily sellable, or lending the same amount of money to an intermediary company that then bought the same shares, and which paid my investment back as a loan repayment. The net position was that I owned the holding company, the holding company owned the trading company, and I had no money tied up in the process.The other potential benefit of the holding company is that I can move money up from the trading company to the holding company via dividends, so that in the unlikely event that the trading company goes bust the assets in the holding company are safe. The drawback (apparently) is that the holding company can't make any kind of profit, not even interest on deposits, without becoming an investment company, which (again, apparently) isn't a good thing. All of the above is on the advice of my accountants, so there's no point asking me any detailed questions as I don't know the answers.
RYH64E said:
Alpinestars said:
So overall, I can't see what having a holding comapny achieves in this scenario.
In my case I had the choice of buying shares with a few hundred thousand pounds of my own tax paid money and owning shares in a small company, shares that weren't easily sellable, or lending the same amount of money to an intermediary company that then bought the same shares, and which paid my investment back as a loan repayment. The net position was that I owned the holding company, the holding company owned the trading company, and I had no money tied up in the process.The other potential benefit of the holding company is that I can move money up from the trading company to the holding company via dividends, so that in the unlikely event that the trading company goes bust the assets in the holding company are safe. The drawback (apparently) is that the holding company can't make any kind of profit, not even interest on deposits, without becoming an investment company, which (again, apparently) isn't a good thing. All of the above is on the advice of my accountants, so there's no point asking me any detailed questions as I don't know the answers.
You last point about an investment company makes no sense.
The point about ringfencing is a good one if things go pear shaped, so long as the holding company is used to hold the money for a future date. Otherwise dividends could be paid directly to the shareholder and achieve the same thing, albeit triggering taxable income for the shareholder maybe earlier than might otherwise be the case.
Doofus said:
Alpinestars said:
You can do a return of capital without being taxed. It's the same money, different logistics.
From where? If the money goes in from an individual, then there's no investment or capital shown in the target company's books from which to withdraw.If your're talking about a holding company structure, you have 4 variants.
Debt or equity into Holdco - it doesn't matter.
Debt or equity into trade co - it doesn't matter.
Either can repay loans, and either can return capital. And tradeco can pay tax free dividends to Holdco as a further option.
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