October 30th, 2012 / Insight posted in

Company set-ups that minimise tax

TH writes: Our software business has created a good product and we are looking at how to exploit it. We are thinking of forming a new company owned by the current company so that it could attract equity investment or be sold off independently of the existing business. Is this a tax-efficient approach?

The right way to structure the new business will depend on its financing requirements, and on what you want to achieve when you sell it, writes Jon Sutcliffe, a partner at Kingston Smith LLP. Given that you are thinking about external investment, and of selling the business independently of your existing company, it will need to be held in a separate entity.

Investors may insist on having Enterprise Investment Scheme (EIS) tax status before they put in their money. In this case you will need a company that is not 50% owned or controlled by your existing company. This will also require intellectual property to be transferred to the new company at market value, and will allow you to own shares directly in the new company.

Holding shares in the new company directly brings a big advantage when you come to sell because you will be selling shares and paying capital gains tax at 18% — or even 10% if entrepreneurs’ relief applies. If, on the other hand, the company were to distribute the proceeds to you, you would pay higher rate income tax.

If the investors don’t need EIS relief, and you do not wish to receive the sale proceeds personally, a subsidiary might be a better answer. This is often the case when you want to use the proceeds to fund expansion in your existing business. You may then be able to take advantage of Substantial Shareholders Exemption when the company is sold, rendering the gain exempt from corporation tax.