Our client Mr A was seeking to retire from his trading business and pass the company down to the next generation.
However, the company owned 2 rental properties which Mr A was hoping to retain in order to help fund his retirement.
The goal was therefore to partition the trading and property letting activities carried on by the company, followed by a sale of the trading company to Mr A’s successor, Mr B.
A simple transfer of the rental properties out of the company would have resulted in a significant Stamp Duty Land Tax (“SDLT”) charge and a potential capital gain, therefore this was not a desirable route.
The transaction involved two steps.
- Transferring the rental properties out of the company; and then
- Mr A selling the trading business to Mr B.
Our solution was to transfer the rental properties from the company into a new property rental company owned 100% by Mr A by way of a capital reduction demerger. This enabled the properties to be transferred into a new property rental company with the only tax liability arising being Stamp Duty at a rate of 0.5%.
Following the demerger, Mr A owned two companies: a property rental company and the trading company (via a new holding company).
The next step was to structure the sale of the trading business to Mr B. This was facilitated by way of a “NewCo route”, meaning that Mr B could use company funds in order to purchase the business. As this was a disposal of his personal company, Mr A achieved Entrepreneurs’ Relief on the sale thereby reducing his capital gains tax rate from 20% to 10%.
Mr A was able to sell his business to his successor whilst retaining the rental properties in a very tax efficient manner.