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bigduckontax, Accountant
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Ok . I am the sole director/shareholder of company A . It

Customer Question

Ok . I am the sole director/shareholder of company A . It provides a specialist service , having been incorporated in Scotland in mid 2011. The company is about to pay 20% tax on last years trading . I,and my husband own 50% of another company (company B) ,( also incorporated in Scotland) the other 50% owned by an unrelated person who wants to sell his 50%. Company B bought and developed a commercial property in 2003 ,which is let to an unrelated business . Company B has a commercial mortgage which will be completely paid in 6 years time , it is currently about 1/5th of the property value . These are my questions . 1. Can company A buy the 50% of shares in company B using cash held in the company bank account ? 2 . If it does so, will company A buy them with pre taxed capital ? 3. If in future we wanted to sell the building , would the sale process first include company A selling it's shares to company B(and taking it's profit , and then company B being sold in toto ?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.

However, I am a trifle confused. Company A buys 50% of the shares in company B using cash held in the company's bank account. To which company's bank account do you refer, company A or B?
Customer: replied 2 years ago.

company A has made a lot of money , and not taken it as wages or dividend .

Expert:  bigduckontax replied 2 years ago.

Company A can buy the shares in Company B from the third party thus owning all of Company B. However, for tax purposes this will have no effect as the book keeping entries would be credit Investments debit Bank. Investments total would form an Asset in Company A's Balance Sheet. It would not affect the tax position of Company A in the slightest.

 

If Company B sells the building, an Asset in its books, the book keeping transaction would be debit Cash, credit Fixed Assets [Buildings]. Company A is not affected by this transaction. Any capital gain, or loss, made on this transaction would go through the Profit and Loss Account; that is how capital gains or losses are treated for tax purposes in Companies. Company B can then be sold off, the easiest option, or have the Registrar strike it off. Before selling off the profit could be distributed to Company A as a dividend. This is known as franked investment income and has no tax effect on either company. Company B is now a shell, but will be assessed for tax purposes (20%) according to its Profit and Loss Account.

 

An alternative scenario for an hassle free disposal of the property is for Company A to sell Company B in toto to a third party which is a very easy way to get out of the problem. In this case, however, the capital gain made by company A in disposing of company B goes into Company A's Profit and Loss account.

 

I do hope I have thrown some light on your question.

Customer: replied 2 years ago.

I am a novice at this stuff .1, Would company A avoid paying 20% tax ,(or 40% tax ) by investing in the 50% shares of company B ? The shares would remain the property of company A, bought as an investment by company A , giving a better return then cash on deposit . Sorry to make clear ....company A can only buy 50 % of the shares in company B those for sale by AN Another . The other 50% shares would remain in company B owned by me and my husband .

Expert:  bigduckontax replied 2 years ago.

No, Company A in buying Company B's shares is acquiring an asset, like buying a piece of Plant and Machinery, not trading. However, if it receives a dividend from Company B in one of the ways I suggested this comes in as franked investment income and is effectively tax free. However going down the dividend route would mean that the other 2 shareholders, you and your wife, would receive an equivalent dividend which might not be convenient having regard to your personal Income Tax (IT) positions.

 

Another way for Company B to be made a shell would be for Company A to bill it for services. These would be offset the profit from the property sale in Company B, but conversely produce an increase in the profit level of Company A for Corporation Tax (CT) purposes. CT is always 20%, it doesn't change with profit levels unlike IT which increases in stages. This is how big businesses like Starbucks, Amazon and Vodafone operate except their billing companies are located in offshore tax havens like Gibraltar, Channel Islands or the Turks and Cocos Islands thus removing most of the profits from the tax man's grasp.

bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3106
Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support. I am so pleased you were able to fathom out the nuances of this relatively tricky situation.

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