There are various reasons why it may be necessary to transfer assets between two companies. In this blog, we will consider how this can be done, and some of the reasons for doing so, from the perspective of company restructuring (as opposed to acquisition).
Why would I want to transfer assets between companies?
Company assets can include money, goods, real estate, and intellectual property. Other than acquisitions (where these assets will normally be transferred to the purchasing company as part of the sale), reasons for transferring assets between companies include:
Creating a holding structure
Creating a parent-subsidiary (group) company structure can help to mitigate risks by cushioning the holding company from the liabilities incurred by their actively trading subsidiaries.
Normally the key assets in a group of companies are transferred to a non-trading holding company to protect them from risks incurred by the trading subsidiaries.
Company owners who wish to diversify their products and services, or go in a new direction, may decide to set up a secondary company. In this case, it may be necessary to transfer some assets to the new company to provide it with necessary investment (e.g. before it starts generating revenues).
Company owners who are looking to sell up may want to hold on to certain assets (e.g. intellectual property) so that they do not form part of the sale. If they intend to start trading again in the future, it may be sensible to set up a new company and transfer these assets across.
How to transfer assets between two companies
The transfer process itself can take the form of a contract for transfer/purchase of business assets.
In the case of money transfers, this can be done as a loan or by purchasing shares in the other company (or through dividend payments, if shares in the transferor company are owned by the recipient company).
However, depending on whether or not the companies are both part of a group, there can be taxes to pay.
Assets can be transferred between two separate limited companies (i.e., which do not form part of a group), but it should be noted that Capital Gains Tax (CGT) will be payable by the recipient company if the assets are transferred free of charge or below the fair market price.
There are a variety of rules which apply to CGT, and different rates which relate to the disposal (sale or transfer) of assets. In this scenario, the best option will generally be to sell the assets to the new company at a fair market value to avoid CGT.
Assets can be transferred between companies which form part of a ‘group’ structure without being liable for CGT. This is part of the “no gain/no loss rule” in the Taxation of Chargeable Gains Act 1992 s 171 (1), which ensures that “assets can generally be moved around a group of companies without any immediate capital gains consequences. This recognises that business activities carried on within the overall economic ownership of a corporate group, within the charge to corporation tax, should, in broad terms, be tax neutral.”
To meet the CGT exemption rules which apply to group companies, it will be necessary for there to be (i) at least one subsidiary company and (ii) one parent company which owns at least 75% of each subsidiary. Parent companies and subsidiary companies can be set up in exactly the same way as any other limited company is formed, as long as the parent owns the requisite shares in the subsidiary.