Departing shareholder / director

Departing shareholder / director

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A limited company client jointly owned and managed (as directors) by four individuals has sought my advice on the following matter, and for this I will need all the help I can get.

One of the shareholder / directors is to leave and will receive 25% of the undistributed reserves at the date of his departure in some form or another, which would be in the region of £50K

The company is profitable generating profits in the region of £200K per annum, the directors take nominal salary and the rest in dividends, and the shares have been held in excess of 2 years.

In an ideal world the departing shareholder / director would sell his shares to the remaining 3 shareholders for about £32K and receive a payment for compensation for loss of office of £18K.

I'm sure someone out there will tell me why it is not a perfect world.

John Lewis

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By jamesbailey
26th Oct 2005 13:43

Not quite perfect...
I'd need more information to give definitive advice, but here are a few ideas:

First, the capital gain. Provided the company shares qualify for business taper relief, any gain will be reduced by 75%. The current annual exempt amount for CGT is £8,500, so effectively a gain of up to £34,000 will be covered by this after taper.

Assuming the departing shareholder has no other gains in the tax year, and pays tax at 40%, then if the gain is £50K, the CGT due will be only £1,600 (assuming the base cost of the shares is only a nominal sum). If the others can come up with £50K to buy him out, that is probably the simplest solution.

Compensation for loss of office is tricky. HMRC have become more and more aggressive on this, arguing that the payments are either "unapproved retirement benefit schemes", or payable under the contract of employment, and thus do not benefit from the £30K exemption. In a case where the departing director is also selling his shares, they will also argue that the payment is really further consideration for the shares. This is not to say that it is impossible to get the exemption - but great care is needed.

Has he had his shares for over 5 years? - if so, the company could buy them back and he could still be treated as making a disposal for CGT purposes - if less than 5 years, this is treated as a distribution of profits and taxed as income.

If you would like more detailed advice on a professional basis, please contact me to discuss this.

James Bailey
Chartered Tax Adviser
[email protected]
01822 810169

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