GHI Ltd & Mr B – Commercial Property driven proposed reorganisation

Background GHI Ltd is a 2nd generation family owned manufacturing business 12k sq ft trading premises owned by Mr B & his partner outside the company and rented back Previous involvement of commercial broker meant all funding done separately.

o property loan NatWest - £300k against MV of £550k (albeit at time corporation tax was 30% and taper relief available so right advice at the time)

o CIF with Lloyds - £100k facility, Drs typically £700k, minimal drawdown, expensive service chargeo OD £25k and bank account with Barclays – never usedo Asset Finance via various funders, c£200k o/s

T/O £3m, PTP £100k Company paid £72k rent to Mr B, who was also drawing £60k from co by way of salary and dividends Deposit paid for new €350k machine wanted to borrow £150k to extend trading premises by 2.5 sq ft. to accommodate. Rent to increase to £91k Next door building (9k sq ft) empty and for sale at £670k

Challenge Customer had no cash contribution – extra cash always put into additional stock Banks attitude to transactional lending changed – won’t do ‘stand-alone’ and not strong enough case to consider

proposition on investment criteria. Cost of extension wouldn’t be reflected in increased value, so potential issue re LTV and ability to lever Tax rules had changed Even with the extension, client would have to rent further space to accommodate additional raw material and

element of finished goods picking lines caused by increase in production

Solution Newco created with same 50/50 ownership as property partnership GHI Ltd became trading subsidiary of holding co. Property sold to Newco for Market Value - £550k (hadn’t increased in value since original purchase) No CGT (due to no increase in value since purchase) £12k SDLT paid £250k director loan created in Newco New funding arrangements put in place with single provider

o Next door 10k sq ft ppty bought £550ko Rent on combined properties now £150ko CIF facility increased to £600k at a lower service charge. £150k drawn by way of upstream dividendo New loan £800k agreed to take up debt from existing ppty (£300k) + balance new property (£400k

Benefit New property bought without need for deposit Cost of drawing new CIF facility not much more than existing service charge alone New loan agreed at cheaper rate and longer term as now connected trading loan in group structure Security held within group so Mr B & partner no longer personally liable Rent Tax saved under new structure = £37.5k p.a. [£150k x (45%personal rate -20% corp tax rate)] Property now part of a trading Group so attracts 100% BPR as opposed to 50% BPR for Inheritance Tax Purposes Mr B able to draw £250k from director loan in Newco, therefore able to reduce gross drawings from business Profits required to service new rent of £150k = £187k. Was £131k for £72k. So doubled capacity & moved everything to same site with only marginal increase in net cost, and worked out

cheaper than if they had kept same structure and merely extended premises

Rent £72k

GHI Ltd & Mr B – Commercial Property driven proposed reorganisationo Don’t have to rent additional space (£40k p.a.) / doesn’t account for time saved in moving materials off

site / more flexibility to spread manufacture in both buildings / can offer more pick & pack solutions for customers / more flex to buy in bulk when prices work in favour

Current position

Property Company

Resulting position

This is specific to transfer of commercial properties within a group structure.

The changes to various rules and regulations, specifically SDLT and interest relief to Landlords will mean a differing impact for transferring residential buy to let properties in the same way.

These different scenarios will be covered off in different case studies.

Mr & Mrs B

Mr B & Ms C GHI Ltd

E,F,G,H

80% 20%

Mr & Mrs B

GHI Ltd

GHI Holding Ltd

100%

80% 20%

Property

E,F G,H

GHI Ltd & Mr B – Commercial Property driven proposed reorganisation