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Where Taxpayers and Advisers Meet

Reducing a large share capital

Incredulum
Posts:2795
Joined:Thu Dec 03, 2009 5:35 pm
Reducing a large share capital

Postby Incredulum » Tue Mar 26, 2019 6:07 pm

Holdco has a share capital of £1m and one shareholder - an individual. Holdco owns Subco, a trading company, which has share capital of £1, the balance being funded by intercompany loan of £1m, and accumulated profits of £200k.

The shareholder would like his capital back.

If Holdco is liquidated and its assets distributed - in capital fashion - to its shareholder, these assets would amount to £1.2m in total, being an intercompany loan of £1m, plus shares in Subco worth £200k.

I think this would cause us to fall foul of the 'no phoenixing' anti-avoidance rules, but a prior distribution of the £200k of accumulated profits to the shareholder should allow capital treatment?

Thereby the shareholder is able to extract future profits on the £1m loan tax free, and has suffered a total tax bill of 38.1% on £200k.

Where are the flaws in this clever plan, please? Thanks

Incredulum
Posts:2795
Joined:Thu Dec 03, 2009 5:35 pm

Re: Reducing a large share capital

Postby Incredulum » Tue Mar 26, 2019 6:09 pm

If Holdco really did reduce its share capital, it would be no help as the entirety of the £1m capital value (basis £1m) could only be paid out as taxable income dividends.


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