Last week we discussed splitting companies, or separating them from a group, and some reasons why that may be desirable. Today we are effectively looking at the reverse of this, covering the process of creating a group and considering why this may be attractive under certain circumstances.
Again the process of creating a group is a complex one and requires clearance from HM Revenue & Customs in addition to the legal documentation of the transaction. We have considerable experience in dealing with such restructuring and helping shareholders achieve their objectives in a tax efficient manner.
Advantages of a group
A group of companies, rather than several standalone companies, can be attractive for a number of reasons, for example:
- Asset protection – a group holding company can be used to protect assets such as the premises which a subsidiary trades out of. In the event a downturn in trade, the premises can be protected and retained even if trade ceases.
- Group Relief for Corporation Tax. Broadly, trading losses in one company can be used to offset profits in another company in the same tax group. This does not apply to brought forward losses, therefore losses incurred prior to the creation of group cannot be offset. For this reason it is preferable to create the group before losses are incurred.
- Group Relief from Capital Gains Tax and Stamp Duty Land Tax (“SDLT”). Companies individually owned by the same shareholder would normally be considered Connected Parties and so the transfer of capital assets between them would be treated as a disposal at market value. This could therefore create a tax charge between the companies. Assets within a group however can generally be transferred inter-group free of Capital Gains Tax and SDLT (although there can be a claw back of tax if a company subsequently leaves the group).
- Long term structure – splitting separate activities into separate companies within a group can give flexibility over which parts of the business may ultimately be retained and which may be disposed of, taking advantage of generous tax reliefs available on the sale of a trading subsidiary.
This is a very broad summary of a complex issue, if you have questions about protecting assets or the tax reliefs mentioned above then please contact our Tax Director, Jenny Marks.
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