We’ll look at moving assets from your company to another company. We’ll also examine why you’d want to do that. And how a holding company structure is a good option for you. Let’s look at
- Background
- Why move assets?
- Holding company
- Group Structure
- Summary
Background
Tom Hillfigure owns 100% of Wetgear Ltd, a farm clothing company. Tom is 62 now and hasn’t the same zest for business as before. The company has an office in Dublin and a warehouse in Portlaoise. The properties are worth €450,000, and they are debt-free. The company bought both properties in 2016 for €200,000. There’s also €550,000 in cash in the company.
Wetgear has done well over the years and is profitable despite Tom taking out a 6-figure salary. The company also makes pension contributions for Tom. Tom’s pension pot is about €800,000, and he plans to access that at 65. He has identified two employees who he thinks could take over the business. They have been very loyal to him over the years and have different skillsets. Plus, they have energy. He’d like to give them some shares in the business on the one hand. But he’s not sure what to do with the assets he has built up.
Why move assets?
Tom has many reasons why he’d like to separate the properties and cash from the trading company. Firstly, it doesn’t make sense to him to give his two employees a percentage of the assets. He took all the risks and worked the long hours to build up those assets. He sees the assets as another form of pension for him. In most businesses, the company would rent business premises. That’s what he wants. His company would rent the properties to the trading company. This would give that “other company” an income.
Retirement is at the forefront of his mind. He’d like to be sitting on a beach somewhere when he’s 65, and he’s not thinking of Tramore. He would plan to get another €20k a year from the company with the assets in it, to give him an annual income of €60k.
Pension at retirement
Let’s assume Tom’s pension pot at retirement is €800,000. He can take 25% of that as a tax-free lump sum. That leave €600,000. He will put that into an ARF and drawdown 4% per annum until he’s 70, and then it will be 5% every year.
| €600,000 x 4% | €24,000 |
| State pension from 66 | €16,000 |
| Dividend from the new company | €20,000 |
| Total income | €60,000 |
Holding company
Tom plans to set up a holding company and transfer the assets from the trading company to that. He meets his advisor, Mick Breen of Breen and Breen and Sons. Mick comes up with a cunning plan. The gist of it is that Tom’s new holding company will own 100% of Wetgear Ltd. Once it does, Tom will transfer the cash and properties from Wetgear Ltd to the holding company.
So, he will hive up the properties and cash to the holdco, and all that remains in Wetgear Ltd is the trading company. Mick asks Tom a question
“Hey Tom. What about leaving the properties and cash in Wetgear, and we can transfer the trade to a newco?”
Tom, scratching his chin and looking all pensive, says no. It’s not a runner. There would be too much admin. He has a lot of great trading history with the existing company. He doesn’t want to inconvenience customers and suppliers. Plus, they’d have to pay him into a new bank account. Too many headaches and more dealings with Revenue to get a new VAT number which isn’t always easy!
A new DAC is born
It’s a new DAC, and I’m feeling good. DAC is a designated activity company. One of those activities is that it can take over another company. Company law isn’t my area of expertise, but I believe Tom needs a DAC for his holding company. He decides to call it John Gear DAC. So, Tom is now the 100% owner of two companies, John Gear DAC and Wetgear Ltd. The next step is to set up the Group structure.
Group Structure
In a group structure, Tom will own 100% of John Gear, and John Gear will own 100% of Wetgear. Tom won’t own Wetgear directly. His holding company will own it, and he owns 100% of the holdco. Tom is on top. Underneath him is the holding company, and underneath that is the trading company. To do this, Tom will swap his shares in Wetgear Ltd for new shares in John Gear DAC. This is a share-for-share exchange. Once the paperwork is right, the group is in place, and Tom can move to the next step, which is to transfer the assets.
Transfer the property
Wetgear will transfer two property assets to John Gear DAC. This is a transfer, so it’s a disposal for Capital Gains Tax. As the transfer is between two connected parties, the value will be market value. It’s important that Tom has a valuation for both properties at the time of transfer. He’ll need to engage an auctioneer. But won’t there be CGT to pay?
On the face of it, there’s a Capital gain in Wetgear. It bought two properties for €200k and is selling them for €450k. That’s a gain of €250k, and CGT on that at 33% comes to €82,500. But, as there’s a group where one company owns 75% or more of the other, they can avoid this CGT cost. This allows there to be no gain and no loss to the company transferring the property. John Gear effectively buys the property and inherits the same cost that Wetgear had. So, if John Gear sells the properties at a future date, its base costs will be €200k
The other tax on transfer is Stamp Duty. The current rate of stamp duty for commercial properties is 7.5%. For assets valued at €450k, that would result in a stamp cost of €33,750. There’s also a stamp duty relief when it comes to group structures. To get the relief, there must be a 90% relationship, plus that 90% must be in place for two years post the transfer. A stamp duty return needs to be filed, and the relevant relief claimed on that return.
Transfer the cash
Cash isn’t a chargeable asset, so there’s no CGT on transfer. There’s no stamp duty either. To get the cash from one company to the other, Wetgear will dividend the cash to John Gear. They can do this tax-free. But they will still do a dividend withholding tax return to show the amount and date of the dividend. Both companies will need to make the correct election in their corporation tax returns. This election is to confirm that the dividend isn’t liable to a close company surcharge in John Gear. Not making the elections on time can be costly.
John Gear will have €1 million in assets after all the transfers. It still owes Wetgear Ltd €450k for the two properties and can pay that cash back to Wetgear to clear the debt. However, Wetgear now has €450k in cash, and we don’t want it there. That cash can go back up to the holding company by means of another dividend. Again, there would be no tax to pay, but they would do a dividend withholding tax return. And make the elections in both companies to avoid the close company surcharge in John Gear Ltd.
Summary
Tom has achieved his goals by moving assets from his trading company to his holding company. He transferred the cash and property in a very tax-efficient manner. By availing of the CGT and Stamp Duty reliefs, he saved over €115,000 in tax. He now owns 100% of a holding company, which in turn owns 100% of his trading company. The trading company is now clear of investment assets. That puts Tom in a position to give shares in it to his two key employees.
He must be mindful of any Stamp Duty or CGT clawback in the coming years by giving away too many shares. For example, if he gave 20% of the shares to his two employees within two years, then there would be a stamp duty clawback. Remember, the 90% group structure must remain in place for 2 years. A big plus for Tom is that he has the cash and property in a company that he owns 100% of. As mentioned, this company can generate an income by renting a property to Wetgear Ltd. That will bolster the existing cash in the company and help with running costs. Plus, it gives Tom a war chest for his retirement.
And if an offer comes in for the trading company in the future, there should be no CGT to pay by John Gear Ltd. A very successful outcome for Tom. He can now reward his two employees by giving them a stake in his trading company.
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