Tax-Efficient Restructure and Family Wealth Planning
Introduction
Our client, the owner of a successful group of businesses, received an offer to sell the entire issued share capital of their main trading company for approximately £4 million. With no immediate need for the sale proceeds, they sought to reinvest the funds for the long-term benefit of their family in a tax-efficient manner.
The group structure included a trading company with around £2 million in cash reserves, a subsidiary generating approximately £500,000 in annual turnover, a property company holding investment and operational properties, and a separate LLP used to contract with clients. Staff were employed through a management company, and shares were held by both the property company and family members.
The client’s goals were to extract value from the business efficiently, ensure the sale would qualify for Substantial Shareholding Exemption (SSE), and explore estate planning options, including potential IHT mitigation through trusts.
The Issue
The primary objective was to restructure the group to allow the sale of the business in a way that would qualify for SSE, avoiding corporation tax on the gain. At the same time, the client wished to release and reinvest the group’s retained profits, particularly into the family’s property company, without incurring unnecessary tax charges. Given the group’s operational and ownership complexity, there were multiple considerations, including goodwill treatment, shareholding structure, and future IHT exposure.
Our Solution
We advised our client to hive down the trade and assets of the main company into its wholly owned subsidiary. This would allow the parent company to dispose of the subsidiary while qualifying for SSE, assuming all relevant conditions were met.
We confirmed SSE should be available, as the subsidiary was trading and wholly owned. We also reviewed the correct accounting treatment of goodwill and ensured that the hive-down transaction would not trigger anti-avoidance provisions, provided the sale occurred in line with the timeline and substance requirements.
Practical challenges, such as the involvement of the LLP, the VAT group, and the employment structure, were addressed to ensure a clean transfer of operations into the subsidiary. After the sale, the parent company would declare a significant dividend, expected to be £5–6 million, to the property company. These funds could then be reinvested into additional property or other assets for the family’s benefit.
In parallel, we reviewed the client’s IHT position and advised on the potential use of family trusts and other planning tools to reduce exposure, preserve wealth, and ensure long-term succession planning.
The Outcome
The restructure enabled our client to qualify for SSE, allowing for a tax-efficient disposal of the subsidiary. The dividend strategy provided a clean and efficient way to move profits into the property company for reinvestment. Our IHT advice laid the groundwork for future planning and asset protection.
Overall, our client achieved a simplified exit, efficient profit extraction, and a clearer path toward multigenerational wealth preservation.
Valuing shares is essential for anyone involved in business or investment decisions. Whether you’re an investor seeking to determine the worth of a potential investment or a business owner considering the sale of shares, the method of valuation you choose can significantly influence the outcome of your financial decisions. In this article, we will examine four of the main methods for share valuation: maintainable earnings, recent transactions, net assets, and dividend yield.
Maintainable Earnings Approach: Focusing on Sustainable Profitability for your share valuation
The maintainable earnings method is one of the most commonly used approaches for valuing shares. It centres on assessing a company’s ability to generate consistent, long-term profits. This approach involves analysing past earnings and adjusting them to remove any irregular, one-off events that might skew the company’s true earning potential. For example, extraordinary gains like asset sales or rare losses such as legal settlements are excluded from the calculation.
The main goal of this method is to determine the company’s true earning power, how much it can consistently generate in the future based on its current operations. After calculating the maintainable earnings, this figure is typically multiplied by an industry-specific multiple to estimate the value of the shares. This method works particularly well for businesses with stable earnings, such as established manufacturers or retailers, whose financial history follows a predictable pattern.
Recent Transactions Approach: Reflecting Current Market Activity
Another method for valuing shares is the recent transactions approach, which looks at the prices at which shares have recently been bought or sold. The idea behind this method is that recent market transactions offer an accurate snapshot of a company’s value. If a company has undergone a transaction, such as a share sale, merger, or acquisition, this method can serve as a real-time reflection of the company’s worth.
However, the recent transactions method has limitations. If there have been few transactions, or if those transactions occurred under unusual circumstances (such as during a market downturn or distressed sale), the resulting value might not accurately reflect the company’s true worth. This method is particularly useful for private companies or businesses that have recently been involved in significant deals, as it offers insight into what buyers and sellers have agreed upon in the market.
Net Assets Approach: Assessing the Value of Physical Assets
The net assets approach, or asset-based valuation method, provides a more straightforward way to value a business. It calculates the company’s worth by subtracting its liabilities from the total value of its assets. This method is ideal for businesses that have substantial physical assets, such as real estate, machinery, or inventory. Essentially, it asks: what is the company worth if all of its assets were sold off and its debts were paid?
While this method is useful for asset-heavy businesses, it doesn’t always capture the full value of a company, particularly in industries where intangible assets, like intellectual property, brand reputation, or customer relationships, are crucial drivers of value. The net assets approach is often used when companies are being liquidated or for businesses focused primarily on tangible assets, most usually property-investment companies.
Dividend Yield Approach: Valuing Shares Based on Income Generation
For businesses that regularly distribute dividends to shareholders, the dividend yield method offers an alternative way to value shares. This approach focuses on the income that shareholders can expect to receive from their investment in the form of dividends. It compares the annual dividends paid by the company to the current share price, giving investors an idea of the return they can expect.
This method is particularly valuable for companies with a strong track record of paying dividends, such as utilities or established businesses with stable cash flow. However, it’s less applicable to high-growth companies that reinvest their profits into expansion rather than paying dividends. The dividend yield approach gives investors insight into the immediate income potential of the shares, rather than their long-term growth prospects.
Choosing the Right Valuation Method
The right method for valuing shares depends largely on the circumstances of the business in question. Each of these methods provides a unique perspective on a company’s value, and in some cases, combining multiple approaches can offer a more complete and accurate valuation. As a tax adviser or investor, understanding these different methods is essential for making informed decisions about investments, mergers, acquisitions, and tax planning. The key is to select the method that best reflects the company’s financial health and aligns with your investment goals.
Next steps in share valuation
If you find yourself needing a share valuation, don’t hesitate to reach out. Our team can guide you in selecting the most suitable valuation method, perform the valuation, and, if necessary, assist with applying for clearance from HMRC to ensure compliance and peace of mind. Please contact us here.
The UK government has made several amendments to the qualifying asset holding company (QAHC) regime in the Spring Finance Bill 2023, following stakeholder discussions.
These changes are aimed at addressing issues with:
aggregator and parallel funds
corporate funds
listed equities
Aggregator and Parallel Funds
The ownership condition in the QAHC regime has caused some issues when dealing with multiple entities in a structure.
The new rules in the Spring Finance Bill 2023 create an exception for multi-vehicle arrangements, allowing feeder and parallel funds to meet the GDO condition.
The legislation allows for additional vehicles to be added to the arrangement later, which should accommodate changes in investors’ requirements.
Corporate Funds
The government has made a significant change to the ownership condition, enabling corporate funds to use the GDO condition.
The amendment in the Spring Finance Bill 2023 expands the types of entities that can meet the GDO condition to include both a CIS and an AIF that is not a CIS solely because it is a body corporate.
This change is retrospective, taking effect from the introduction of the regime on 1 April 2022.
Listed Equities
The Spring Finance Bill 2023 also amends the investment strategy condition, allowing QAHCs to hold listed securities and still meet the investment strategy condition.
However, this change comes with the denial of the distribution exemption for all listed securities, disadvantaging holdings that would otherwise qualify under the investment strategy condition. This change will take effect upon Royal Assent.
Overall, these amendments to the QAHC regime demonstrate the government’s willingness to engage with stakeholders and address issues as they arise. The changes should make the regime more workable for a variety of investment arrangements and structures.
The multi-vehicle arrangement rule is expected to take effect when the Spring Finance Bill 2023 receives Royal Assent, likely in the summer of 2023.
QAHC changes: Conclusion
In summary, the UK government has made several important changes to the QAHC regime in the Spring Finance Bill 2023.
These amendments address issues with:
aggregator and parallel funds
corporate funds
listed equities
Demonstrating the government’s commitment to making the QAHC regime more workable for a variety of investment arrangements and structures.
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Tax Considerations for Your Clients when Business Exit Planning!
The Accountants’ Mastermind and Andy Wood Director at ETC Tax talksTax Considerations for Your Clients When Business Exit Planning.
During this meeting, Mark was joined by ETC Tax Director Andy, who talked about the key tax considerations for owners of owner-managed and family businesses when looking to exit from them. Andy puts a Willy Wonka spin on the important tax considerations for your clients.
Andy shared the three main routes to exit planning:
* Sale of business to a third party
* Sale of business to employees and key management
TA demerger typically involves the splitting of a company’s business into two or more parts.
There are many reasons why a company demerger may be desirable. Some of these examples include:
The shareholders of the business may wish to part ways and run their ‘parts’ of the business via separate entities.
The shareholders wish to incentivise employees of different service lines and for commercial purposes, view it is as more beneficial to do this under separate entities.
The business is serving separate market segments. The directors believe that these would serve best under different management and via separate entities.
There are typically three routes to achieving a demerger:
Statutory
Reduction of share capital
Liquidation
Recommendations are that you obtain HMRC clearance prior to implementing a demerger. Typically, this is why it is you request HMRC’s approval of the bona fide commercial purpose test in relation to the transaction.
Statutory demergers provide a relatively simple method of separating a company’s activities. They allow shareholders the flexibility to split their trading activities and assets without generally crystalling tax liabilities. Statutory demerges have strict conditions associated with them, which can make them unattractive or indeed unfeasible in certain circumstances.
For example, one of the conditions associated with statutory demergers is that there must not be a ‘chargeable payment’ for five years following the demerger. These rules state that the demerger must not form part of an arrangement. One of the main purpose of this is the making of a chargeable payment.
The definition of chargeable payment is broad. You catch scenarios where there is a sale of the demerged business post demerger. So, the main reasons for undertaking this action is to dispose of the business post demerger.
Therefore, in scenarios where there is an impending sale of the business soon after the demerger, statutory demergers would not be a feasible option.
Clearance request
We recently came across a scenario whereby a client in the pharmaceutical industry had requested clearance from HMRC under the statutory demerger provisions. There was an intention to sell one of the pharmacies post demerger. One of the reasons for undertaking the demerger was to be able to sell the pharmacy separately. So this course of action for the pharmacies into separate companies was considered an appropriate commercial route. Unsurprisingly, the clearance was refused by HMC under the chargeable payments rule set out above.
We carried out detailed analysis, redrafted and submitted a new clearance application to HMRC under a different set of provisions (in this case the reduction of share capital demerger rules) which HMRC accepted. We had to ensure that the mechanics of the transaction was amended in order to meet the detailed criteria of the demerger provisions, which did not prove to be too onerous for the client from a commercial viewpoint.
Demergers are a complex area of tax law and it is important that you seek specialist tax advice, both from tax and legal viewpoints. Our specialist corporate tax team has many years of Big Four and Top 10 experience of advising on all aspects of demergers.Get in touch today.
