# selling business!!?



## rustyjack (11 Apr 2011)

Hi,

would appreciate some advice please.

my father and I have a company which is in trading difficulty.
We now owe revenue approx 20k, DETE (redundancy) 20k and my father personally approx 700k. Trading has stopped this month with no pick-up in the foreseeable future.
this is very dissapointing as there is an opportunity to generate trading income within the company and pay my father 700k tax free but unforunately, we cannot see a pickup in trade anytime soon.


so, assuming we cannot make a profitable business in the near future, was just wondering whether the following solution makes any sense?

can we sell company (with liabilities) and my father's asset (loan to company) to another business? We would sell the company for 1 euro and my fathers asset for a fraction of the 700,000 - taking into account liabilities of company etc ? This would allow another trading company with associated director to generate income at 12.5 percent and pay the director tax free out of profits... very advantageous i would think in the current climate of high taxes!!

i am not a financial whiz so dont know if anyone has done anything like this..

thanks,
rusty


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## Brendan Burgess (11 Apr 2011)

You are mixing up your assets and your liabilities.

The company owes €700k to your father. This is a (worthless) asset for your father but a liability for the company. 

If I buy the company from you for €1, it makes no difference. The company still owes your father €700k. Why would I buy that company? 

If a company started off with a lot of share capital and has lost most of it through accumulated losses, but is still solvent, it may have a value to a purchaser because of the unused tax losses.  But with 12.5% tax in Ireland, I don't think that people are buying tax losses anymore. 

The only solution for your father is to find a business which is guaranteed to generate profits so that he can repay the loan out of the profits. But if he has lost €700k in recent years, this is unlikely.

Can you park the company until things pick up? I suspect that the DETE amount is an asset and not a liability. It sounds life a refund of redundancy payments paid by the company, on which a refund is due. You should be able to get the Revenue's agreement to set the amount due from the DETE against the amount owing to the Revenue.

Brendan


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## mandelbrot (12 Apr 2011)

Brendan Burgess said:


> I suspect that the DETE amount is an asset and not a liability. It sounds life a refund of redundancy payments paid by the company, on which a refund is due. You should be able to get the Revenue's agreement to set the amount due from the DETE against the amount owing to the Revenue.
> 
> Brendan



It's pretty much irrelevant to the wider issue but I'd say it's more likely that it is money owed to DETE. Redundancy lump sums that a company was unable to pay due to lack of access to funds, will be paid out of the Social Insurance Fund, and as a result the company owes DETE 40%, rather than DETE owing the company 60%...


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## rustyjack (12 Apr 2011)

Brendan Burgess said:


> You are mixing up your assets and your liabilities.
> 
> The company owes €700k to your father. This is a (worthless) asset for your father but a liability for the company.
> 
> ...


 
thanks for your advice brendan.
my fathers 700k loan to company was as a result of transfer of business from sole trade to limited company on which he obtained retirement relief.

i was thinking that if a successful trading company would buy our company which has liabilities of

1) 20k revenue
2) 20k DETE (company cannot afford 40 percent portion)
3) 700k loan 

while at the same time all or one of the members of the company buying my father's asset:

1) 700k loan to company

then the members of this successful trading company could avail of tax advantage of extracting profits from company through the 700k loan which they would own. My understanding is that this is the most efficient way to extract profits from companies tax free.

at the moment, as we cannot afford 40k we may need to liquidate if we cannot sell business. It would be a shame for my dad to lose his retirement sum like that.

thanks for your advice,
rusty


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## Brendan Burgess (12 Apr 2011)

Thanks Mandelbrot.  That seems more likely but as he had been classifying an outstanding loan as an asset, I thought he might have been classifying an asset as a liability.


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## rustyjack (12 Apr 2011)

mandelbrot said:


> It's pretty much irrelevant to the wider issue but I'd say it's more likely that it is money owed to DETE. Redundancy lump sums that a company was unable to pay due to lack of access to funds, will be paid out of the Social Insurance Fund, and as a result the company owes DETE 40%, rather than DETE owing the company 60%...


 
yes mandelbrot, that is the situation. Thanks for the clarification

Rusty


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## NumbrCrunchr (12 Apr 2011)

Hi OP

Prior to liquidation it is possible for your father to convert his loan to share capital and at least he would have this as a capital loss in the event of future capital gains.

Regards
NumberCruncher


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## rustyjack (12 Apr 2011)

NumbrCrunchr said:


> Hi OP
> 
> Prior to liquidation it is possible for your father to convert his loan to share capital and at least he would have this as a capital loss in the event of future capital gains.
> 
> ...


 
thanks very much numbr... i presume if he sells building which is in his own name (which he may need to do to pay off bank loan secured against building), this capital loss can be offset against his capital gain on selling the building (assuming he can find a buyer!!!  )

rusty


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## Importer (12 Apr 2011)

I see what you're getting at Rusty.

I suppose the big question is, what price will your father sell his 700K "asset" in the company at ?

To make any sense of it you will need someone to buy the company for say 1 euro (as you suggest). The buyer in turn will need to discharge the other outstanding liabilities of the company and after that use the 700K liability to take money out of the business tax free.

I'm interested in your proposal if you want to PM me


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## Brendan Burgess (12 Apr 2011)

It wouldn't be hugely tax efficient, so it won't be worth that much.

I buy the company for €1. 
I buy the loan from your father, from your father for €1. 

The company makes € 845k profits. 
It pays 12.5% tax   €105
Leaving it with cash of €740

It pays €40 to the third party creditors.
It pays €700 to me to repay the loan.

I pay 25% CGT on the loan - €175k

I net €525k 

If I just made €845k profits in a company and paid it to myself as salary, I would pay around 55% tax or €465.

I would end up with a net of €380

So it would be worth €145k to me. (525 - 380)

It would be worth more if I had over €700k in CGT losses forward which I was unlikely to use against any other gains.

I would have to be sure of the profits. 
They would have to be cash profits, so that I could pay them out immediately. 

I would deduct the cost of tax advice and legal work. 

Do the losses forward have to be used against the same trade? If so, then it restricts things further.

All in all, if my business was generating €800k + profits and cash per year, I wouldn't be bothering with this sort of arrangement.


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## mandelbrot (12 Apr 2011)

Importer said:


> I see what you're getting at Rusty.
> 
> I suppose the big question is, what price will your father sell his 700K "asset" in the company at ?
> 
> ...



This just isn't a runner lads, if I understand what ye are actually talking about doing: the same person is going to buy the share capital, for €1, and separately they're going to buy this 700k debt from Rustyjack's Dad..?

A debt is an asset for CGT purposes, but an original creditor is not entitled to claim an allowable loss on their assignment or sale of a debt, so Rustyjack's Dad gets no CGT loss for offset against a future gain.

Also, S.541 (2) TCA 1997 states that _"the satisfaction of a debt or part of a debt is treated as a disposal by a creditor (other than the original creditor) thus giving rise to a chargeable gain or an allowable loss."_ So the person who buys the 700k debt will have to pay CGT on the difference between 700k and what they bought the debt for. So unless they buy the debt for next to nothing, they won't really be saving themselves anything...

And there's possibly other anti-avoidance issues that I just can't think of...


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## Brendan Burgess (12 Apr 2011)

Hi Mandlelbrot

Are my figures not correct? 

If a son wanted to help out his father, he could buy the company for €1 and the debt for €85k. The father gets €85k. The son gets the same net income after tax. 



> Rustyjack's Dad gets no CGT loss for offset against a future gain.



This is not an issue in the above transaction. 

If, as Number Cruncher suggests, the loan can be transferred into equity, it would be an issue. However, I don't know if that works.


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## mandelbrot (12 Apr 2011)

Brendan Burgess said:


> Hi Mandlelbrot
> 
> Are my figures not correct?
> 
> ...



Hi Brendan,

Sorry, I hadn't really looked at your figuires ,but looking at them they do make sense!

But as you said, it's not hugely tax efficient, and the major elephant in the room is the issue of generating income in that company out of which to repay the debt... just channelling money from a profitable trading company through that company would cause anti-avoidance issues under close companies provisions I'd say. (I'm assuming anyone who'd even entertain doing this would be a close company director; as it definitely wouldn't be worth the hassle if it's being split between a load of people...)

(I only mentioned the CGT loss (or lack thereof) to make it clear that it is definitely not an option for that proposed structure...)


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## rustyjack (12 Apr 2011)

hi brendan,mandelbrot,

many thanks for your advice and calculations.
i am a bit confused as to the 85k figure as i thought the difference between the net figures are 
525k - 380k = 145k.

again thanks for your help,
rusty


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## Brendan Burgess (13 Apr 2011)

Hi Rusty

Sorry, I got my arithmetic wrong. You are right, it should be €145k

I have edited my post accordingly.


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## simplyjoe (13 Apr 2011)

NumbrCrunchr said:


> Hi OP
> 
> Prior to liquidation it is possible for your father to convert his loan to share capital and at least he would have this as a capital loss in the event of future capital gains.
> 
> ...


 

I like it. A lot!!


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## mandelbrot (13 Apr 2011)

simplyjoe said:


> I like it. A lot!!



I think you need to bear in mind that you're talking about a situation where a person is losing the bulk of €700k. The fact that they can create an allowable loss for CGT purposes isn't going to be of any use to them unless they are actually likely to realise chargeable gains, and even then the best they can do is save themselves 175k, so they're still down at least 525k. Not much of a silver lining really...


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## mandelbrot (14 Apr 2011)

NumbrCrunchr said:


> Hi OP
> 
> Prior to liquidation it is possible for your father to convert his loan to share capital and at least he would have this as a capital loss in the event of future capital gains.
> 
> ...



Have you seen this happen in practice NumbrCrunchr? And if so was it looked at / queried by the tax office?

I'd say you could find a tax inspector hitting you with S.811 - since it's hard to see how one could argue any commercial basis for a person to do this in an insolvency situation, you could only interpret it as being a transaction with the primary aim of creating a tax advantage...


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## mandelbrot (14 Apr 2011)

Importer said:


> I see what you're getting at Rusty.
> 
> I suppose the big question is, what price will your father sell his 700K "asset" in the company at ?
> 
> ...



As with NumbrCrunchr's suggestion about converting debt to equity prior to liquidation, it's very hard to see how you could convincingly argue that there is any commercial benefit to the proposed scheme, other than for the purchaser to derive a tax advantage.

I suppose this is the most relevant part of S.811 TCA 1997 (http://www.irishstatutebook.ie/1997/en/act/pub/0039/sec0811.html) 

_"...a transaction shall be a “tax avoidance transaction” if having regard to any one or more of the following—

 (_ _a) the results of the transaction,

 (_ _b) its use as a means of achieving those results, and

 (_ _c) any other means by which the results or any part of the results could have been achieved,

 the Revenue Commissioners form the opinion that—_ _

 (i) the transaction gives rise to, or but for this section would give rise to, a tax advantage, and_ _

 (ii) the transaction was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage"
_
(Also, a "transaction" as referred to above includes a series or arrangement of transactions, such as selling the share capital as well as the debt to the same party / parties, as part of an overall arrangement.)


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