Yorkshire and North East Dealmakers Guide 2016 - 27
Q&A
27
Has debt had its day?
If HMRC follow through with their proposals for new tax rules from April 2017,
which disallows tax relief for interest paid on related party debt, we expect to
see private equity funds and other buyers moving away from using this type
of debt and perhaps using preferred equity to fund deals.
tax partner
PwC
Email: paul.a.cooper@
uk.pwc.com
Tel: 0191 232 8493
Does this matter to me? Whilst the rules are aimed at multinational businesses,
they catch all but the very smallest UK businesses, as there is only a £2m de
minimus before these rules bite.
The challenges of using equity - distributable reserves A challenge is
you need to have sufficient profits in a company to be able to pay a dividend.
As such it is harder to get your cash out of the business.
The tax bill Whilst dividends are taxed at high rates, it may be possible
to manage the rate down on equity so that you pay at 20% (or 10% with
Entrepreneurs Relief). However HMRC are alert to this and will look closely
at such transactions and have anti-avoidance rules they can apply.
What about existing structures? There is no 'grandfathering' for existing
structures so if you have shareholder debt in place above the limits that will
no longer be tax deductible in the borrowing company from April 2017.
Next steps The consultations are ongoing. Keep watching this debate and
be ready to take steps as necessary before April 2017.
Q&A
Paul Cooper
The 30% of EBITDA restriction Even if the debt is on wholly arm length terms,
tax relief will be denied to the borrower if the total interest expense in the
business exceeds 30% of its EBITDA. Whilst there are some relaxations for third
party debt, these do not apply to related party debt, which often form a major
part of the funding in private equity deals. Add to this that interest income
on the disallowed debt can still be taxed on the debt holders in full, you begin
to see there is no tax upside to the company in having debt funding.
Table of Contents for the Digital Edition of Yorkshire and North East Dealmakers Guide 2016