Shareholder in a start-up - advised to set up a company to hold shares
- Thread starter Honestcon
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Yes it can work with this is not a simple scenario. The reason why you would hold your shares through a holding company is that the latter can sell of the shares without CGT where is qualifies for participation exemption. There are few conditions for this CGT exemption and these include the company being sold is a trading company and that the company holding the shares has at least 5% of the trading company and has held this for at least 12 months.
It is a great relief - however, on a sale of the trading company the sale proceeds (tax free) are now inside your company. To take out these funds has tax implications and that is where it gets complicated. If this investment has the potential to produce a decent gain you need to talk to a tax consultant as there are lots of moving parts.
It is a great relief - however, on a sale of the trading company the sale proceeds (tax free) are now inside your company. To take out these funds has tax implications and that is where it gets complicated. If this investment has the potential to produce a decent gain you need to talk to a tax consultant as there are lots of moving parts.
Thanks for your reply. I appreciate it.
I suppose it all depends on how much I expect to gain from all of this.
But I would tend to think that keeping it simple and avoiding accounts at this stage makes sense. If it looks like we're on to a winner, I presume I can set up a company at that stage and transfer after the requisite 12 months?
I suppose it all depends on how much I expect to gain from all of this.
But I would tend to think that keeping it simple and avoiding accounts at this stage makes sense. If it looks like we're on to a winner, I presume I can set up a company at that stage and transfer after the requisite 12 months?
Brendan Burgess
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Hi Dublin
This is news to me and goes against my general view that you should not really own investments through a company. Can we work through a few examples.
I invest, in my own name, €200k to buy 10% of Gadgets Limited.
I sell my shares in Gadgets after 5 years for €300k. I pay 33% CGT on my gains of €100k.
If I invest via Burgess Investments Ltd, the BIL sells the shares after 5 years for €300k and the gains of €100k are in BIL free of tax. I now have a company which has €300k cash. How do I get it out? Surely I will pay 33% CGT on the €100k gain, so no saving.
What happens if there is a loss?
Gadgets Ltd goes bust , I have a CGT loss of €200k if I invest myself.
If I own it through BI:, I will now have to wind up BIL to get the €200k CGT loss?
The costs of administration
It's just so inefficient to own shares or other investments through a company.
If there is a legal dispute with the fellow shareholders, it will be so much more difficult and expensive to pursue via a limited company.
In short, the tax advantages would have to be huge to justify holding shares through a company.
Companies can be useful for trading operations because of limited liability and the more flexible pension contributions arrangements, but I haven't heard anything to justify setting one up to hold investments of any sort.
This is news to me and goes against my general view that you should not really own investments through a company. Can we work through a few examples.
I invest, in my own name, €200k to buy 10% of Gadgets Limited.
I sell my shares in Gadgets after 5 years for €300k. I pay 33% CGT on my gains of €100k.
If I invest via Burgess Investments Ltd, the BIL sells the shares after 5 years for €300k and the gains of €100k are in BIL free of tax. I now have a company which has €300k cash. How do I get it out? Surely I will pay 33% CGT on the €100k gain, so no saving.
What happens if there is a loss?
Gadgets Ltd goes bust , I have a CGT loss of €200k if I invest myself.
If I own it through BI:, I will now have to wind up BIL to get the €200k CGT loss?
The costs of administration
It's just so inefficient to own shares or other investments through a company.
- The cost of setting up.
- The cost of CRO returns and the potential for errors.
- The cost of tax returns and the potential for errors.
- The cost of winding up the company.
If there is a legal dispute with the fellow shareholders, it will be so much more difficult and expensive to pursue via a limited company.
In short, the tax advantages would have to be huge to justify holding shares through a company.
Companies can be useful for trading operations because of limited liability and the more flexible pension contributions arrangements, but I haven't heard anything to justify setting one up to hold investments of any sort.
Gordon Gekko
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Hi Brendan
The primary advantage is tax deferral. As a result, you have €300k to reinvest (i.e. free use of that excess €100k). Down the line, you are free to liquidate and get the proceeds out at 33%. It also gives you the chance to avail of a lower future CGT rate or to look at options around residence. If you make a loss, it's a bad structure as the loss is not allowable.
The primary advantage is tax deferral. As a result, you have €300k to reinvest (i.e. free use of that excess €100k). Down the line, you are free to liquidate and get the proceeds out at 33%. It also gives you the chance to avail of a lower future CGT rate or to look at options around residence. If you make a loss, it's a bad structure as the loss is not allowable.
Brendan,
There are a few other considerations around the fact that there is no CGT on death so you could potentially hold the holding company in perpetuity having deferred the gain on the trade sale.
As Gordon says, CGT rates could go down in the future, you might become non-resident etc etc it really is good practice to have this discussion early doors with a tax consultant
For some people, me for example, it even makes sense to have a holding company holding the holding company
There are a few other considerations around the fact that there is no CGT on death so you could potentially hold the holding company in perpetuity having deferred the gain on the trade sale.
As Gordon says, CGT rates could go down in the future, you might become non-resident etc etc it really is good practice to have this discussion early doors with a tax consultant
For some people, me for example, it even makes sense to have a holding company holding the holding company
Brendan Burgess
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Sure tax deferral can work - if a person intends to hold the investment until they die or if they are planning to leave the country.
CGT rates could go down, but people who deferred at 20% are now looking at 33%, so rates can rise as well as fall.
That to me is the key reason for not doing this. Most start ups fail. So it would be very important to be able to use the losses against other CGT liabilities.
Brendan
CGT rates could go down, but people who deferred at 20% are now looking at 33%, so rates can rise as well as fall.
That to me is the key reason for not doing this. Most start ups fail. So it would be very important to be able to use the losses against other CGT liabilities.
Brendan
Brendan - Gordon and Marc have made excellent points there. It really goes down to what you want to do with the money - if you want to reinvest it then a personal holding company is the route. If you want to spend it then no holding company. I generally mention it to clients as a tool. It may not be worthwhile for a small investor as you need 5% of the trading company to qualify.
The other thing I would say is that if you don't have a holding company then you won't be able to avail of the nil CGT. It can be difficult to put a valuable asset into a company but is simple when the company has no value. It is also easier now with the audit group exemption under CA 2014.
The other thing I would say is that if you don't have a holding company then you won't be able to avail of the nil CGT. It can be difficult to put a valuable asset into a company but is simple when the company has no value. It is also easier now with the audit group exemption under CA 2014.
Brendan Burgess
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I appreciate that, but most people do actually want to spend their money rather than leave it behind them or emigrate to avoid CGT. I advise people who are buying ordinary shares to buy them directly so that when they die, their CGT limit disappears. But unless you know that you are not going to sell this investment until you die, then I don't think it's a good idea.
I don't fully understand that. If I set up an ordinary company tomorrow, is it not then a holding company? Or is a holding company something else?
I have seen accountants and tax advisors recommend administratively complicated solutions which might work in some scenarios, but where they always give rise to bigger admin expenditure.
But as any capital losses can't be used, this scheme is totally unsuitable for a start-up.
Brendan
Gordon Gekko
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Holding it directly goes against best advice, for the reasons previously set out.
Having a holding company structure still gives you the option of taking the cash out, but it also gives you the optionality around tax deferral.
I hear Brendan's point regarding the loss, but typically the holding company structure is put in place when there is visibility on a successful outcome (rather than at the outset).
Having a holding company structure still gives you the option of taking the cash out, but it also gives you the optionality around tax deferral.
I hear Brendan's point regarding the loss, but typically the holding company structure is put in place when there is visibility on a successful outcome (rather than at the outset).
I would say there's more than a touch of subjectivity around the term "best". As has been pointed out, and without trying to discourage the OP, most tech startups fail, and even in the ones that succeed the returns can be minimal for original investors due to dilution at funding rounds. So, the very small chance of a return has to be balanced against the definite cost of setting up and managing a holding company. Which is "best"?
Gordon Gekko
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Rather than selectively quoting my post, you could have also included the bit where I suggested that as one gets greater visibility on the success of the venture, one can put the holding company structure in place.
Apologies - I know I read it, but that qualification didn't sink in. But realistically: surely the decision has to be made long before there is visibility on likely outcome?
Gordon Gekko
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Not really...The 12 month condition means you can effectively do it a year out which is generally plenty of time. Plus setting up and running a holding company isn't as expensive as one might think.