Tax Efficient ways to Ringfence Property Assets

Many companies own the premises from which they trade and many have an investment property with no connection to the trade. Owners of businesses may wish to separate property assets from the trade for a number of reasons.

For example, to make trade more attractive to potential buyers, to ring-fence assets (arising from concerns over the future of the trade) or to transfer the property into a pension scheme. Here, we briefly take a look at examples of what can be done in common scenarios.

Pre-sale tax planning

Company A owns:

• a warehouse from which it trades
• two relatively small investment properties when compared with the size of the business.

The shareholders are seeking to exit from the business in the medium term but realise that potential buyers would not be interested in acquiring the investment properties and may have their own premises.

The directors could set up a new stand-alone company and transfer the properties to it.

Why transfer properties into a new company?

If structured correctly and subject to clearance from HMRC, the key benefits are:

• No Stamp Duty Land Tax payable on the transfer of property.
• No income tax, capital gains tax or corporation tax payable on the restructuring of the companies.
• A ‘clean’ trading company that is more attractive to purchasers.
• Entrepreneurs’ relief (10% capital gains tax) on sale of trading business.
• A rental stream paid by trading company to the property company for use of trading premises.
• Legal separation of the property away from any risk of a downturn in trade.
• Long-term potential for a family investment-holding company providing income or capital growth for future generations.
• However, there are other considerations, such as Inheritance Tax and any outstanding finance charges on the properties that need looking at before undertaking any planning.

Concern over the future of the trade

Company B has come through a difficult period of trading where profits have dropped.

• Reserves are still healthy and bank obligations have all been met.
• There are no plans to sell the business in the medium term but the downturn made directors realise that the property is at genuine risk from creditors.

The Directors could form a new holding company to own 100% of the trading company and the property can be transferred to the new parent company.

Why create a parent/holding company?

• After completion the shareholders will own shares in the parent company and a Group is formed tax purposes. There are no personal tax liabilities. The creation of the parent company in straightforward circumstances should not require HMRC clearance.
• Assets can be transferred between Group companies free of tax implications so that no corporation tax implications arise.

This planning is primarily motivated by a wish to ‘de-risk’ the business and ring fence assets as opposed to tax strategies. It works equally with surplus cash reserves transferred to the parent company.

If a sale of the trading company is likely further planning may be required to ensure that shareholders benefit from entrepreneurs’ relief on an eventual sale of the business.

Transfer into Pension scheme

Company C has four director/shareholders and owns a property from which it trades.

Over a number of years the company has paid in the maximum amount of pension contributions on behalf of the directors. The pension scheme has strong cash balances.

The business has been struggling to expand and grow and the owners are seeking to secure the assets for their long term retirement plans. The business may not have a great sale potential and the company has been advised that the pension scheme could acquire the property from the business.

Matters to be aware of

• The company gets a tax deduction for a commercial rate of rent paid to the pension scheme.
• No tax payable by the pension scheme on the receipt of rents.
• The company may have a tax liability on any gain arising from the sale of property.
• The pension scheme will be unable to obtain tax relief for any expenditure it incurs as owner/landlord of the property.