It’s the dream situation – you have a great idea or a talent, you set up a company, things take off and many years later, you have a valuable company that you and your family rely on to provide meaningful work and security for the future.
However, times are tough and those reserves that have built up are at risk. Trading companies may protect shareholders with limited liability protection, but the assets in the company itself are potentially 'up for grabs' should your business come under pressure or you suffer an unexpected (and uninsured) catastrophe. Commonly, value can be stored up in commercial property, or in surplus cash reserves.
There are many ways you could reduce the level of reserves at risk, such as:
Options 1 and 2 are viable options, but can be expensive. A personal dividend currently attracts tax of up to 38.1%, and it is expected this rate could increase in the (now delayed) post COVID budget. Option 3 is efficient but the amount that can be put into a pension is limited, funds are tied up until retirement, and there are restrictions on how money can be used once it is in the pension environment. Option 4 is therefore a good alternative solution.
Reorganising, which in the simplest case involves the introduction of a new holding company, provides several benefits:
In the right circumstances, going a step further and reorganising to split the business completely (by way of a demerger) can be worthwhile. Jane MacKay, Head of Tax, talks more about this option in her article on group reorganisations and demergers.
If there are commercial reasons for reorganising, there are other potential wins that you could achieve cost efficiently while going through the process, again subject to appropriate advice.
Employees could be given a special class of share giving them rights to the value in the underlying trading company. This could help retain and motivate employees in a tax efficient way, particularly if achieved through the use of an HMRC approved Share Incentive Scheme like the Enterprise Management Incentive. This almost always secures Entrepreneurs’ Relief for the employee on a future share sale, while giving the company a corporation tax deduction.
Family members could be introduced as shareholders in the new holding company, with their own class of share. These new shareholders may benefit from lower effective rates on dividends, and the concerned parent or majority shareholder could keep these shares in a Trust to ensure control is retained and value is kept within the family line. A Trust is also a very good way of routing income to non-taxpaying grandchildren, when the tax savings can be significant. See more in our article on the tax implications of Trusts.
A reorganisation could help facilitate a tax efficient exit of a shareholder who is no longer interested in the business, or provide an opportunity for dissenting shareholders to take the business forward in an alternative way.
Considered advice is needed - there are pros and cons of proceeding with such changes – and HMRC clearances will be necessary. This means there will be costs of implementing a reorganisation and maintaining the new structure, plus some further complexity.
However, with good advice, the benefits of putting in place appropriate plans and a structure to suit your objectives should significantly outweigh the downsides.
For more information or to discuss your individual circumstances get in touch with your usual Crowe contact and we can take you through your options.