How to structure Land and Business Purpose for Tax Efficiency

Hatrick24

We are in the process of purchasing a business and the freehold land it trades from. At present the land and the trading company are both owned by one limited company.

Our proposal is to split the purchase into two, so that my husband and I will fully own the freehold land, whilst the trading business will be owned jointly by us and a colleague.

Our lawyer has suggested that we purchase the trading business into a new Ltd company, so as to eliminate the risk of any skeletons in the closet and reduce the amount of due diligence required. This made sense to me, however, the sellers solicitor says it needs to be a share purchase in order for the sellers to claim entrepreneurs relief.

I am not an expert, but my limited investigation on entrepreneurs relief is that you can claim it on sale of assets / goodwill and land. Does anyone know if this is correct please?

Also, with regard to the land, I am trying to determine whether we should purchase it as individuals or into a Ltd company. It would seem to be better to purchase it individually, but again, any advice anyone can offer would be appreciated. The land is valued at £500k and we will be taking out a loan to part finance the purchase. I am told stamp duty of 3% is payable whichever way it is purchased.

I think we probably need to go to a tax advisor, but don't know one and so am not sure where to start.

Any advice gratefully received! Thank you!!

antrobus

I'd have thought that the obvious problem was this; if the land is valued at £500k, it's very likely the company paid a lot less to acquire the land, and so taking the land out of the company may will trigger a CGT liability of £xk. Ergo, that's not a course of action most people would want to follow.

chrismac1

You definitely need good tax advice. For a start it is not necessarily just about ER, there is Business Property Relief to consider too, which is more important in some situations. In most cases it is better not to purchase in a limited company but the rules on ER and BPR - though similar - are different.

Ang given some of the tax cases in this area it is clear that HMRC take an especially pedantic clause by clause approach, incidentally totally at odds with their public stance on certain issues in the tax avoidance sphere where "the spirit not the letter of the law" is spouted when it suits them.

ER for a limited company is claimable only on a share disposal and there are loads of rules on share classes and holdings to comply with too. So we can safely say the vendor's solicitor knows more about this field than yours.

jimmo

As both the business and the land are currently owned by a company the only thing the vendors own in person is shares in the company and the vendors should qualify for Entrepreneurs Relief on the sale of their shares.

It then follows that if the company that owns the land sells it, even to the current shareholders, the company will have a corporation tax (not capital gains tax) liability on its profit.

For the vendors the next problem would be how to extract the net sale proceeds from the company into their own wallets.

Hatrick24, on the face of it, your best interests would probably be to buy the land personally as a separate entity to the business and, as far as I can see, your lawyer has advised you correctly what is best for you and the vendors’ solicitor has advised the vendors what is best for them.

That is perfectly right and proper and the rest is down to negotiation and/or one side pulling out.

As I understand it BPR is Business Property Relief, applicable to Inheritance Tax, but I’m not clever enough to appreciate how important that may be to you.