Selling a Shell Vintage Private Ltd Company

[Morag Turner]

Hi

I am looking to sell my private Ltd shell company which has a trading history since 1995 it comes with bank account and also a Directors Loan account which would give the purchaser substantial tax savings. Can anyone suggest were I should advertise it for sale ?

 

[Clinton]

Tax savings? How? Via the Director Loan or via retained losses? How much?

 

[Morag Turner]

Hi both are available - Directors Loan Account at £234K Corp Tax Losses at £265K

 

[Clinton]

What's your asking price?

(To answer your original question, you can advertise it for sale at these locations)

 

[STDFR33]

Hi both are available - Directors Loan Account at £234K Corp Tax Losses at £265K

Corporation tax losses probably cannot be relieved.

 

[STDFR33]

What's your asking price?

(To answer your original question, you can advertise it for sale at these locations)

Out of curiosity, what do you think it's worth?

 

[Clinton]

if you want my valuation service, I'll have to invoice you first

 

[STDFR33]

if you want my valuation service, I'll have to invoice you first

I bet my valuation is closer than yours on this one, so I'll give your offer a miss

 

[Mr D]

Hi both are available - Directors Loan Account at £234K Corp Tax Losses at £265K

How would directors loan account work on that?

 

[STDFR33]

How would directors loan account work on that?

Assuming that the OP intends to assign the loan to the new director.

 

[Mr D]

Assuming that the OP intends to assign the loan to the new director.

Presumably only worth something if the company has that money lying around or can easily get it.
In which case surely worth more to OP than to a buyer?

 

[Alan]

I'm not sure I understand the components - so as a complete novice I'm writing down my thoughts.

OK so the company owes the director £234k, that gets assigned to the new director? Is that legal? As Director Old has a personal asset of a loan note and he gives that loan note to Director New as a gift - surely not - they would have to sell that note to Director New for it's market value ( which I assume would be a lot less than £234k as the probability of the company paying is very very low - so would that get sold say for £1?

Now the loan note has some value as the director will be able to extract £234k out of the future business profits effectively tax free? Is that right? So maybe a value up to 40% of £93,600.

The the company has £265K Corp tax losses - so that is worth a maximum against future profits of 19%? So that has a maximum value of £50,350 - against future profits ( assuming that carrying forward is allowed ).

Obviously there has to be something in it for the buyer, and the cost of due diligence for any skeletons in the cupboard and legal fees and risk or not ever making the profits to realise the tax benefits?

So effectively this is selling the future tax benefits of past 'losses' versus future profits on to another. Is that right?

 

[Clinton]

You're right, but as I said to @STDFR33 in a private message yesterday, I was hoping the OP would come back with his price before I explained the issues related to the DL and why it is worth, if anything, only a tiny fraction of the amount on the books

...and why it's a near impossibility to utilise those accumulated losses.

 

[Morag Turner]

A previous valuation was for around £40K

 

[STDFR33]

A previous valuation was for around £40K

Who was it valued by?

 

[UKSBD]

...and why it's a near impossibility to utilise those accumulated losses.

Edited :

Could someone put £500k in, double it, then take a £750k out tax free and business be on 0 tax liability even though it has 250k?

Or put nothing in, earn 500k, take out 250k tax free and business be on 0 tax liability even though it has 250k?

Or are there regulations to stop things like that hapening?

 

[Mr D]

A previous valuation was for around £40K

Valuation by someone who was buying it?
Sounds like it's not worth anything like that from the info posted. Perhaps we are all missing some info, or valuation too high?

 

[STDFR33]

Edited :

Could someone put £500k in, double it, then take a £750k out tax free and business be on 0 tax liability even though it has 250k?

Or put nothing in, earn 500k, take out 250k tax free and business be on 0 tax liability even though it has 250k?

Or are there regulations to stop things like that hapening?

The £500k can be taken back to repay the loan without tax consequences.

If the company make £1 or £1m taxable profits, there's corporation tax to pay.

 

[UKSBD]

what about the original 234k directors loan?
Can the business earn 234k, pay the directors loan account and have no tax liability?

If not, could the original director of business do this?

 

[STDFR33]

what about the original 234k directors loan?
Can the business earn 234k, pay the directors loan account and have no tax liability?

If not, could the original director of business do this?

No.

The business will always pay tax on its taxable profits (less any allowable losses).

 

[Clinton]

what about the original 234k directors loan?
Can the business earn 234k, pay the directors loan account and have no tax liability?

If not, could the original director of business do this?

As @STDFR33 says, if the business makes £234K in profit, it pays approx £46K in corporation tax. It now has £188K or so left.

If there is no outstanding director's loan, the director can only withdraw the £188K as dividends and he'll have to pay tax on that. If the company owes him £234K then he can withdraw the entire £188K as a loan repayment leaving the company now owing him (£234K - £188K). As it's a repayment of money he already put into the company, and he's not earning any new money, he incurs no tax liability on it.

@Alan , yes, pretty much. Except that past losses can't be transferred to another business. In fact, they can't even be transferred to another trade within the same business ie. to avail of the tax savings the buyer would need to continue whatever trade was being run when the loss was made ... and he needs to make at least that £265K in profit in that trade in that business to be able to use that loss. To benefit from the accumulated losses he'll probably have to invest significantly to turn around the failed business. This is a lot less attractive a proposal than owners of these failed businesses seem to realise (and I get to speak with a fair few of them!)

 

[Alan]

Ah ha, so to me it is worth zero. So i'm out

 

[STDFR33]

Ah ha, so to me it is worth zero.

You are not not alone.

 

[Clinton]

The value of accumulated losses is not zero. Even given my earlier comments about the difficulties with using those losses against future profits, there are ways it can be done.

However, it's a lot more complicated than most people appreciate. Let's look at the law and HMRC guidance:

Any major change in the trade being conducted or the way the business is run (or if the business is dormant) means that losses can't be carried forward.

So if Acme Ltd buys our OP's business, Acme Ltd will have to continue the same trade and convince HMRC that there has been no major (or minor!) change. No employees change, no supplier change, no product change. But there has been a major change. There has been a change of ownership!

And there are other conditions that likely haven't been met. All of these apply if there is a change in ownership of the OP's company (let's call it OP Ltd).

So what about if Acme Ltd buy the assets rather than the shares of OP Ltd to avoid the change of ownership issue?

An asset purchase doesn't involve a change in company ownership. So, is that a way around the problem? Well, not really. Unfortunately, the loss doesn't transfer with the assets, it'll remain with OP Ltd.

There is a roundabout way to do an asset sale to include transfer of the loss.

But let's look at something else: The OP's business could start a subsidiary, NEWOP Ltd, and transfer the existing trade (and the associated losses) to NEWOP Ltd. Yes, subject to various conditions it is possible for a subsidiary to acquire not just the trade from the OP's business but also the associated loss.

So we then sell NEWOP Ltd, right?

Wrong! Because it's still a company sale i.e. change in ownership of NEWOP Ltd. And we have to avoid a change in ownership.

So what if NEWOP Ltd isn't sold, but the holding company is sold instead? Remember that it's now NEWOP Ltd holding the loss and NEWOP Ltd is owned by the OP Ltd. So if we sell OP Ltd, there is no change in ownership of NEWOP Ltd.

Clever, right?

Yes. And no. There are problems with this as well (...and ways around those problems).

It can be done, but it's all very complicated and it takes a team of specialist accountants and lawyers to pull this off. It ain't cheap.

Anyway, if anyone is interested in investigating further how to extract money from a loss making company, I wrote an article covering this some months ago.

 

[STDFR33]

@Clinton you missed something else.

If the business has ceased trading for a period, HMRC could well argue that the trade had stopped, and losses died with the trade. Even if it's the same business.

There is case law such as Kirk v Randell where there was a 7 year gap. However, it was shown that although there was a 7 year gap, there was evidence to show that new contracts and work were been sought during the period.
I don't think there's much argument for anyone wishing to utilise the losses of the OP's company.

 

[Clinton]

I did mention dormancy affecting carry forward but you are correct, yes.

If I notice anything else, or remember anything else pertinent to the above post of mine, I'll add it below later.

 

[UK Contractor Accountant]

Shouldnt be a problem in fufure with the relaxation of the rules on carry forward of losses post 1 April 17?

 

[Clinton]

Good point, but it's not that much of a relaxation, IMO. Among other things the relaxation, such as it is, won't apply to the OP as his is a dormant company without assets.

Also, if I remember correctly, the relaxation will only apply to those losses made after April 1st, 2017.