protecting your clients’ wealth 13 november 2013 the solutions specialist
TRANSCRIPT
Protecting your clients’ wealth
13 November 2013
The Solutions Specialist
Agenda
• Introduction
• Wealth maximisation for business owners
• Wealth protection for business owners
• Summary and questions
About Leonard Curtis Business Solutions Group (“LCBSG”)
• National firm with 10 offices
• Over 150 staff and 15 Insolvency Practitioners
• Not part of an accountancy practice therefore Independent and Director led
What makes us different?
• Specialists in the SME market
• Wide range of service lines aimed at insolvency avoidance
Introduction
The LCBSG business model
Introduction (continued…)
• Protecting wealth of business owners – • By maximising upsides• By mitigating downside risk
• Hopefully provide useful hints and tips for clients
• Some are common sense, others are relatively unknown - until they bite!!
Wealth maximisation
• Beneficial company structures
• Solvent restructuring
• Debentures
Opco/Propco (1)
• Term used to show that the trade of a company (the operating company, or “Opco”), is held separately from some or all of its assets (the property company, or “Propco”)
• In its simplest form, the Propco rents the assets to Opco. This can be freehold property, or just the trading fixed assets
• Benefits if properly structured:• Can save significant amounts of income or inheritance tax• In the event of the trading company failing, the assets could be protected• Could maintain a degree of privacy
Opco/Propco (2)
• May be difficult to achieve if:• The Bank has cross guarantees on both companies• The consideration for the assets transferred remains unpaid • The assets transfer was effected at undervalue – possibly no time limit for
reversal• Other intra group indebtedness• VAT group registration
• Important to get professional advice on valuations and structure
• Common in care home and leisure sectors, due to property values and trading risk – although HMRC are looking closely at these structures
Solvent reconstructions
• Carried out under the provisions of s110 Insolvency Act 1986
• Allows a business to be split into various parts, in a number of stages
• Often the purpose is to allow part to be sold, or for IHT benefits
• It will require a Members’ Voluntary Liquidation at some point in the process
• Unless very strict HMRC guidelines are followed and clearance from HMRC
secured beforehand, this will not be effective
• Not tax avoidance, merely mitigation of liabilities
Solvent reconstructions – Example (1)
• Each situation is unique
• But… in this example:
• Company owns a very successful trading business and several properties
• Company has significant net assets
• Sole shareholder/director approaching retirement
• He wishes to mitigate IHT
• Full HMRC clearance was secured in advance of the following transactions to ensure tax compliance
Solvent reconstructions – Example (2)
Structure at start Stage 1
S/holder
Old Co
Old Co
New Co
S/holder
New Co acquires shares in Old Co from S/holder in
exchange for shares in Old Co
Solvent reconstructions – Example (3)
Stage 2 Stage 3
Old Co
New Co
S/holder
Old Co properties distributed in specie to
New Co
S/holder
New Co
Old Co
Invest Co Trade Co
2 new companies
set up
Solvent reconstructions – Example (4)
Stage 4
Old Co
New Co (in liquidation)
S/holder
Invest Co Trade Co
a) New Co enters liquidation using s110 provisions
b) Properties distributed from New Co to Invest Co
c) Shares in Old Co distributed from New Co to Trade Co
d) Tax clearance obtained and CGT avoided
b)
c)
a)
Solvent reconstructions – Example (5)
Final outcome
S/holder
Invest Co Trade Co
Shareholder now owns 2 IHT tax efficient companies – one with the properties, one with the trade
Caveat: Tax and insolvency advice is essential to ensure tax benefits are achieved
Debentures
• Valuable tool for securing loans to Company – if correctly undertaken
• Ability to earn interest on funds lent to Company
• Fixed and floating charges
• Beware of :• Avoidance of certain floating charges
• Charge taken at the same time or before loan• Subject to “hardening” period• The Rule in Clayton’s case – account needs to “turn over”
• Deductions from floating charge proceeds
• Hardening of fixed charges
Wealth protection
• Overdrawn directors loan accounts
• Personal guarantees
• Fraud warranties
• Personal liability arising from HMRC
• Insolvency issues
Overdrawn directors’ loan accounts
• How they usually arise:• Directors make a monthly draw of funds from the company, which is
converted to dividends at the year end – assuming profitability• Where there are insufficient profits, it can’t be distributed• This creates a debt due to the company from the director
• In insolvency, the IP will always seek repayment
• We see these being converted to salary shortly before insolvency – dissipates an asset, and creates a liability to HMRC - misfeasance
• The existence of an overdrawn loan account will make it difficult to secure a Time To Pay agreement from HMRC
Personal guarantees• A personal guarantee (“PG”) is usually provided by a company director
• It creates an obligation to repay a specific debt of the company in the event of the company’s failure to pay – usually through insolvency
• PGs on bank/ABL debt• Increasingly common, especially for invoice finance• Various Government lending schemes require director guarantees for at
least a portion of the debt• Valuable incentive for director to assist in minimising loss to lender
• Supplier credit accounts• Beware: some suppliers will include a PG in the account opening form• Keep copies of all account opening forms, after they have been signed. If
necessary, this can be used to verify what has actually been signed
Personal guarantees (Continued…)
• Property leases• Can be a significant contingent liability on a 25 year lease• May not just cover rent – could include dilapidations
• Fraud warranty on factoring/CID agreements• Not a PG, but can create a personal liability where a lender suffers a
shortfall• Directors warrant, amongst other things, that the invoices are properly
drawn• In the event of an irregularity, the lender may invoke this warranty to seek a
personal contribution to their shortfall, even if there is no PG• Rarely used, except where there is fraud, such as advance invoicing, or
“fresh air “ invoicing
Personal guarantees (Continued…)
• Mitigating guarantee liabilities• Provision of guarantees can’t always be avoided, but
• Read before you sign;• Shop around different providers;• Try to negotiate a cap, or limited period;• Take legal advice – it could save thousands.
• Keep a detailed record of what guarantees have been provided• If failure is possible, assess how the guarantees can be minimised, within
the bounds of the insolvency legislation• Be mindful of preference and misfeasance• Seek early advice
• Personal liability
– Revenue Directions 72(5)
– Personal Liability Notices
– S216 Insolvency Act 1986
HM Revenue & Customs
• Re untaxed remuneration
• Allows HMRC to recover unpaid PAYE and ER NI on such payments from the
director personally
• Possibly on O/D loan account, or other cash payments
• HMRC issue a Regulation 72(5) notice – burden on individual to show that tax
was not falling due on payments
• Direction notices dealt with around the country
PAYE Directions 72(5)
• Covers all arrears of NIC –
– usually following commencement of insolvency
• Only used in cases of serious neglect or fraud
• Serious neglect can include persistent non payment of NICs
• Can require the “culpable officer” to pay all arrears to HMRC (could include an
external accountant, in certain circumstances)
• Intended to punish the officer (O’Rourke v Commissioners of HMRC)
• Only dealt with in London Investigations team
Personal Liability Notices
• S216 deals with reuse of a prohibited company name
• Applies to a “Newco” following liquidation
• Provisions are complex
• Failure to comply can result in personal liability
• Increasingly used by HMRC
S216 Insolvency Act 1986
Insolvency issues
• S216 Insolvency Act
• Wrongful trading
• Misfeasance
• Preferences
• Transactions at undervalue
• Transactions defrauding creditors (common offence for partners in professional services firms)
• Common sense approach – if it looks and sounds wrong – it probably is, and there is a provision in IA86 to catch it
Summary
• Various steps can be taken to protect or maximise wealth
• Some steps are highly technical and complex
• Requires specialist advice, specific to the circumstances
• Cost of advice is often negligible, compared to savings made or cost of problems avoided.
• Minefield for the unprepared in a stressed business
Questions
Contacts
Leonard Curtis Rescue & Recovery Corporate Strategies
Paul Masters - 07921 471000 Ed Preedy – 07714 481 020
[email protected] ` [email protected]
Conrad Beighton - 07595 400 952
Wolverhampton office Birmingham office
Regent House 85-89 Colmore Row
Bath Avenue Birmingham
Wolverhampton, WV1 4EG B3 2BB
Tel: 01902 810102 Tel: 0121 200 2111
Fax: 01902 810103 Fax: 0121 200 2122