INTM508020 – Intra-group Funding: 'thinning out'

'Thinning out' - example

The simplest way to thin out a foreign-owned UK business is to insert a new UK holding company.

Take the straightforward case of a US-owned UK business which has no debt whatsoever. Suppose its funding requirements are satisfied by ordinary share capital of £50m and retained profits of £50m.

• The US parent now sets up a new UK subsidiary which is to become the new UK holding company.
• This new company in turn purchases the UK operating subsidiary from the US parent at the market price of £100m.
• The purchase by the new company is funded by the US parent by a mix of debt (£50m) and equity (£50m ordinary share capital).

In this example, nothing has changed in commercial terms as far as the group’s operations or activities are concerned. However, interest on the debt of the UK holding company might now be claimed to be deductible for corporation tax purposes with the loss in the holding company being surrendered by group relief against the profits of the UK operating subsidiary.