Thinking favours holding personally:
Assuming both the individual and the UK limited Company have a strong initial cash position, then purchasing the shares in the individual’s name makes sense.
In short, this is because:
- If the shares are held in the Company and they are worth a considerable amount of money then this can change the underlying nature of the Company to that of an investment company. This can have consequences for inheritance tax and how the Company is taxed now;
- From a Capital Gains Tax perspective, if held personally,you then get the benefit of the £11,100 (your spouse too) annual exempt amount on any capital gain each year – even more useful if you can sell the shares over a period of time. (Companies don’t benefit from this arrangement);
- There would be a tax relief in the UK on any tax paid in Australia on the gain when the shares are realised via a foreign tax credit;
- If the shares are held in a limited company and that Company has losses carried forward, then those losses cannot be used to offset alternative profits;
- You would have to do a share transfer to retain the value of the shares if the individual wants to shut the limited Company down for any reason;
- It wouldn’t harm taking specialist tax (and Australian duty) advice if the investment is significant.
Also:
- Should the shares pay dividends, or you make a capital gain on the sale of some shares, then the company will pay Corporation Tax at 20% (or whatever the prevailing rate) with no allowances or exemptions.
- And of course when the tax has been paid in the Company, the money is still in the Company and a further layer of personal tax needs to be considered when withdrawing the money from the Company into your personal account.
So summary is hold personally:
- The tax rates for 2016/17 on capital gains is 10% if your taxable income is less than £32k, and 20% if it’s more.
- And this is money that is now in your hands and can be put to whatever purpose you want – be that personal or lending money to that original company so it can do the next big thing.
And for those who want the full picture – there is a counter argument:
There is something called the Substantial Shareholding Exemption (SSE) which would apply to a foreign company. If it does apply then essentially if the investor holds the shares (more than 10% of total shares to qualify) in his Company for more than 12 months any capital gain on the sale will be exempt of tax.
See https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg53000.
Clearly there are conditions that need to be met but if the investment qualifies this is a tax efficient way of holding the shares. The regulation is out for consultation and therefore subject to change so one would need to do some research and take specialist advice.
We originally thought that the foreign status of the investee company muddied the waters. We checked it out and apparently it’s fine. The legislation was originally designed for corporate restructures (and we think to make UK holding companies as attractive as some of their offshore relatives).
There are a few requirements as noted above – for example, the investee company has to have been trading for 12 months before the sale etc.
And there is still the point that the money is in the Company and would be taxed when extracted.
This is not advice or recommendation; it is intended to be practical, useful guidance on what to consider, what steps you may wish to take and/or where to look further.