Should your company have a ParentCo?

If you operate a trade through a limited company, and your ‘numbers’ are big enough, then there are some scenarios where it is often best advice to insert a parent company above this trading company, to create a simple group structure:

• As a risk management measure, to enable valuable assets (eg business premises, investment property, spare cash, tools of the trade) to be moved up a level and be protected from potential uninsured claims should the main trading company get into future financial difficulties. There would be no personal tax leakage by extracting this value through such intra-group dividends/dividends in specie.
• To create a structure where, after 1 year, if the trading subsidiary were sold, the proceeds from this sale would be received by the parent tax free. This is achieved by claiming Substantial Shareholding Exemption, which shelters the proceeds away from tax so long as this cash is not extracted by the ultimate individual shareholders.  So, typically, this is of value where there is a retirement related trade sale and the ultimate shareholders wish to recycle the cash into a new business or investment venture, eg property investment or quoted equities. If, upon selling the business, you change your mind and now want the cash personally, so long as this liquidation of the parent company is within 3 years of the sale you would be no worse off personally tax wise (ie you would still be entitled to the 10% rate of business asset disposal relief CGT rate).
• To deflate the value of the trading subsidiary to make it more affordable for 3rd party shareholders (eg key management) to buy in an equity stake.
• To enable the business to be floated (eg as an IPO on the AIM market).

Although probably not key drivers for creating such a structure, other benefits include:

• Where you do not wish the book-keeper of the trading company to see the dividend transactions with the ultimate shareholders.
• The ability to crystallise indexation allowance on any long held property, as a hedge in case this generous corporate tax rule is abolished (as it was with personally owned assets wef 2008).
• To enable a clean ‘reset’ for the relationship between the ultimate shareholders and the business (ie the parent company shareholdings and Articles of Association).
• To tidy up the business (eg, non core fixed assets, onerous ongoing contracts, loss making activities) to make a future sale of a (clean) subsidiary more attractive.
• If you have 2 or more separate trading companies, connecting them under a shared parent company, this can give additional tax advantages on loss relief, tax neutral transfer of assets, etc.
• If you currently own the business premises personally, to protect them from ‘business risk’, selling them to the new parent company would improve their entitlement to Business Property Relief, for inheritance tax purposes, from 50% to 100%. It would also allow you to extract cash from the group at a lower tax rate than if you took dividends.

This is quite a complex area, with legal, tax and commercial dimensions. As with all such planning actions, advice relevant to your specific circumstances should be sought from your usual Whitings contact before proceeding further.

Disclaimer - All information in this post was correct at time of writing.