A second generation, family-owned manufacturing business, with a 12,000 sq ft trading premises under Mr B’s ownership. His partner was outside the company. The business paid £72,000 annual rent to Mr B for this premises. He would also withdraw £60,000 annually from the company by way of salary and dividends.
With a turnover of £3m and post-tax profit of £100,000, the business was looking at borrowing £150k in order to extend its trading premises by 2,500 sq ft so as to accommodate the purchase of a new machine, for which a €350,000 deposit was paid. As a result, the annual rent would increase to £91,000.
All previous involvement of commercial brokers meant that funding was separate to the business, as follows:
- A property loan from NatWest – £300,000 against Market Value of £550,000, with corporate tax set at 30%
- A CIF (expand acronym) with Lloyds Bank – £100,000 facility, Drs (expand acronym) typically £700,000 with a minimal drawdown and expensive service charge
- An overdraft of £25,000 and a bank account with Barclays – this account was never used
- Asset Finance through various funders, c. £200,000 o/s
Mr B had no cash contributions as any extra funds were invested into additional stock. Furthermore, the banks’ attitude to transactional lending had changed and they would not support the business or consider the proposition on investment criteria.
This meant there were three main issues:
- The cost of an extension would not be refelected in the increased value, causing issue for the loan-to-value ratio and the ability to lever
- Mr B would be required to rent further space to accommodate all additional raw materials and elements of the finished goods, picking lines caused by the increase in production
- The tax rules had changed
The solution was to create a new holding company.
Firstly, approval was obtained from HMRC confirming that the restructure of the business was entirely appropriate for its long term commercial future. The consequence of this at the same time ratified the significant tax savings achieved.
This resulted in the business retaining the same 50/50 structured ownership as the initial property partnership. It produced five changes:
- The business became the trading subsidiary of the new holding company, and the property was sold to the company for the Market Value of £550,000
- The business incurred no Capital Gains Tax because there was no increase in value since the purchase
- The business paid £12k in Stamp Duty Land Tax
- This created a new £250k director loan for the owner
- New funding arrangements were put in place with one financial provider meaning:
- 10,000 square feet of property next door was bought for £500k
- The rent of the combined properties was now £150k per month
- The CIF facility increased to £600k at a lower service charge, with £150k drawn by way of upstream dividends
- A new loan of £800k was agreed to take up debt from existing property (£300k) and the new property’s balance (£400k)
As a result, the business and owner realised eight benefits:
- The new property was bought deposit free
- Cost of drawing the new CIF facility was not much more than the existing service charge alone
- A new loan was agreed at a cheaper rate, and longer term; and now had a connected trading loan within the new Group structure
- Security was now held within the Group, so Mr B and his partner were no longer personally liable
- Rent Tax saving under the new Group structure was £37,500 per annum [£150k x (45% personal rate – 20% corporate tax rate)]
- Mr B was able to draw £250k from a director loan in the new Group company, reducing gross drawings from the business
- The profits required to service the new rent of £150,000 to £187,000, where it was previously a ratio of £131,000 to £72,000
- They were able to move materials to the bigger site for a minor net cost, and this was cheaper than keeping the old structure and simply extending the premises