A limited company offers some insulation from financial risk for the proprietor of the business – though just how much protection it offers will depend on the extent to which the shareholders are required to give personal guarantees for loans made to the company.
A company also offers protection from the “doomsday scenario” type of risk – say a huge claim for damages by a customer which is not covered by insurance.
In some sectors, customers are used to dealing with limited companies rather than individuals or partnerships.
Where the business trades from premises which it owns, the premises are likely to contribute a significant amount to the value of the business. It therefore makes sense to separate the premises from the risks of the trade. There are two conventional ways to do this:
Have the premises in a holding company and conduct the trade through another subsidiary company, wholly owned by the holding company
Have the premises owned personally by the shareholders
Both these structures have their advantages and disadvantages. For example, the holding company and subsidiary structure means that the two companies will be “associated” and that therefore the small companies’ rate of corporation tax (21%) will only apply to the first £150,000 of profits instead of the first £300,000, and the remaining profits will be taxed at 29.75%.
The personal ownership of the premises means that some of the company’s profits can be extracted as rent, which is an allowable deduction for the company, and although taxable on the landlord, does not give rise to any NIC liability.
It is when we come to the capital taxes that the contrast is greatest, and the best choice from a tax point of view depends on the “exit strategy” of the owners of the business.
Broadly, there are three possible exits:
Sell the shares in the company
Sell the assets of the company, perhaps retaining the premises and continue to derive rent from the tenant – whether he is the new owner of the business, or a new tenant.
Die in harness/pass the business on to the next generation
Sell The Shares
If this is the strategy, and assuming the premises are sold at the same time, then the rate of CGT payable on the gain will be 18%, or 10% on the first £1million if entrepreneurs relief is available, which it should be in this scenario. These rates will apply whether the property is held in the company or outside it.
Unfortunately, this is not always commercially possible, as the buyer does not want the company, just its assets.
Sell The Assets
This can create a problem, because if the company sells its assets it will pay corporation tax on the gain it makes, probably at 29.75%, and there will then be a further tax cost if the cash is to be extracted from the company. If the premises are owned by the company and are sold as well, the tax cost will be nearly 20% higher than if they had been owned outside the company.
Die in Harness
This is where the real contrast appears – there is relief from Inheritance Tax (IHT) for “Business Property”, and assuming the business concerned is a trading business, then the value of the shares in the company will qualify for 100% business property relief (BPR) – they will be effectively exempt from IHT.
If the property is owned outside the company by the shareholders however, then the rate of BPR is only 50%, and even that is only available if you hold a controlling interest in the company.
LLP
A “Limited Liability Partnership” is a sort of cross between a limited company and a partnership, and in a situation where only 50% BPR seems likely (as described above), it is possible to put together a structure involving a combination of a company and a LLP which preserves the advantages of owning the premises outside the company (10% CGT if sold with the business) whilst avoiding the IHT downside (either no BPR or BPR at only 50%) by securing (after it has been in place for two years) 100% BPR on the property.
The details are complex and you must have expert advice on the implementation, but the end result may be a very significant saving of either CGT or IHT. Which tax you save depends on who arrives first – a buyer for the business, or the Grim Reaper!
James Bailey
