Question re Accounting Treatment

[Doofus]

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?

[Doofus]

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

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following a discussion on how the money used to buy the company could be treated as a Director's loan, and therefore withdrawn from the business at a later date with no tax liability.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?

[Doofus]

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

[Doofus]

bladerrw said:

Possible downside is the CGT position when it comes to sell A - if ever?

Why CGT? Holding company sells A, makes profit, pays corp tax. Holding company pays divi.

[Doofus]

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]

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.

[Doofus]

Alpinestars said:

So overall, I can't see what having a holding comapny achieves in this scenario.

As was suggested earlier, the purchase price can go in to the holding co as a loan. Wouldn't that be an advantage?

[Doofus]

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.

[Doofus]

Alpinestars said:

Not sure what your exact question is.

Debt or equity into trade co - it doesn't matter.

Except that there's no way to get debt or equity into trade co (the one being purchased), because it's not buying its own shares, so the purchase consideration is paid by the buyer directly to the seller. It doesn't go via the target, so no debt or equity is created there. If another Ltd co makes the purchase, then that company has made an investment, and values such on its books. If an individual makes the purchase, then there's no entity from whom he can get that money repaid over time.

[Doofus]

Alpinestars said:

Agreed re a purchase by A. My example was setting up a structure.

But if we are talking about buying a company, either direct or through a holding company, the holding company structure can be debt or equity and it makes no difference from a tax perspective. It's just more difficult to get the investment out if holdco is funded via share capital but not insurmountable. Are you suggesting there is some advantage to funding holdco with debt? There isn't. Apart from the fact a return of capital is not as easy as repaying a loan.

And tradeco can pay dividends to holdco tax free.

Edited by Alpinestars on Thursday 26th May 15:02

I'm suggesting that the individual lends money to holdco, which uses it to buy tradeco. Tradeco then pays divis to Holdco and the individual withdraws money from holdco as loan repayments, and therefore free of tax.

[Doofus]

Alpinestars said:

The free of tax bit is a red herring. The money could be returned by way of a tax free return of capital. The only difference between a loan or equity into holdco is logistics of getting the initial investment out.

Yes, fair enough. The matter at hand was about the use, or not, of a holding co, rather than the actual mechanics of the cash treatment.