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bigduckontax
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 4182
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We are a group of three people who all reside and work for

Customer Question

We are a group of three people who all reside and work for a limited company in the UK. We are going in to partnership in a new venture with a client of ours in the USA in New Jersey which is Inc. (Incorporated).
In return for providing our services and expertise we will be given an equity share in the USA business and a share of revenue received.
The legal advice to us was to form a new UK limited company (owned by the three of us) to hold the equity to provide some liability protection however tax advice to date has been mixed.
The ultimate aim of the new business is to sell it in 2 - 3 years for a significant sum, however I am concerned about the tax liability on the profits of that sale which would take place in the USA but I assume would be taxed here?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question. I always consider providing services through a limited company a good idea as it provides liability protection as you are all aware. My response is based on current UK tax law. As you probably know taxes are likely to be devolved to Scotland and the details of the Scottish regime are as yet unclear. What you can be certain of is Benjamin Franklin's dictum that in life there are but two certainties, death and taxes.
The surplus made by this new company would indeed be subject to UK Corporation Tax (CT). The CT would, of course, be on the surplus and any necessary expenditure by the company to service the business deducted as would participators' remuneration. CT is at 20%.
When you come to sell the company each participator would be liable to Capital Gains Tax (CGT) on any gain made on the sale. Assuming that all participants own over 5% of the shares and are employees or directors [directors are deemed employees anyway] then Entrepreneurs' Relief would probably apply which limits the tax to a flat rate of 10% on the gain as opposed to the normal 18% or 28% or a combination of the two rates depending on each individuals' income including the gain in the year of sale.
I do hope that I have shed some light on the position.
bigduckontax and other Tax Specialists are ready to help you
Customer: replied 2 years ago.

Sorry maybe I wasn't clear. The USA company would be sold, in the current setup the profits of our % of equity would therefore reside in the UK company which we the three of us would be directors of. What would our tax liability be on the proceeds of that sale and would it be more efficient for us from a tax standpoint to own the equity in the USA company as individuals rather than using a Limited company to own the equity?

Expert:  bigduckontax replied 2 years ago.
Right, companies are not subject to CGT, Any gain made from the sale of the USA company would merely form part of the income of the UK company for CT purposes.
Were you to each own USA equity CGT, as I explained it in my original answer, would apply to each individual in proportion to their gain. As individuals you would be entitled to both an Annual Exempt Amount of 11.1K to offset the gain [companies do not receive this largesse] and most probably Entrepreneurs' Relief to limit the tax rate on the net gain to a flat rate 10^. The more efficient method is thus pretty obvious; own shares in the US company as individuals.
Expert:  bigduckontax replied 2 years ago.
Thank you for your support.