Contractors' Questions: Should my limited company own Plan B?

Contractor’s Question: My limited company providing software design services has developed a brand new product that I think could be successful enough to become my ‘Plan B’. Although the product is related to my existing business – it’s an application, I think I could exploit it best if I formed a new company. But what if my current company owned the new company? Would that offer me a tax advantage, or disadvantage, in the event  I seek an investor, or sell it on separately, without affecting my current business?  

Expert’s Answer:  Wanting a tax-efficient approach is acceptable, but the appropriate way to structure the new venture hinges on its financing requirements. It will also depend on what you want to get out of the selling-on process.

To that end, and bearing in mind you want to attract equity investment or sell the envisioned company on its own, it appears that forming a separate entity (outside your existing limited company’s ownership) will be necessary.

Let’s take the Enterprise Investment Scheme as a way you might get an investor on board. The EIS requires the new company to NOT be 50% owned (or controlled) by your existing company. Using the scheme also stipulates that intellectual property migrates to the new business at market value.

Under the EIS, you would be permitted to own shares in the new company. In your circumstances, this holding would be beneficial where you subsequently sell because, in selling, you would only attract capital gains tax of 18%, potentially falling to 10% thanks to Entrepreneurs’ Relief. Alternatively, you’d enter the higher rate income tax band if the company was to distribute the proceeds to you, personally.

 In the event that an investor doesn’t insist on EIS tax status before they put their money in, and assuming you don’t wish to receive the sale proceeds, a subsidiary might be more appealing. When you want to use the proceeds to fund expansion in your existing business, a subsidiary would be the best structure to adopt. Then you could potentially qualify for Substantial Shareholders Exemption, whereby the resulting gain escapes corporation tax when the company is sold.

The expert was Jon Sutcliffe, partner at Kingston Smith LLP, the top 20 accountancy firm.