Extracting cash from a company - share repurchase?
Hi
My client owns 100% of a company that owns some IP rights. He'd like to sell the company, but it has 1.5m of cash sitting in it. I'm thinking that it's unlikely that anyone will want to buy the company with all the cash in it, as they'll have to pay more and will then have the problem of how to extract the cash in a tax efficient manner. I would like to advise my client to extract the cash himself while minimising the tax liability (which suggests trying to get capital instead of income treatment). What would be the best way to do this? A company share repurchase?
If the company does repurchase the shares, what if he only holds 1 share - can it be split? Otherwise how would this work if the company bought back the entire share capital? Or would he have to issue himself a new share before hand?
Finally, how would such a share repurchase be accounted for. Credit cash and debit (what)?
Thanks
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Cant do it
Unfortunately the scenario you outline does not work. To qualify for capital treatment you would need to substantially reduce your clients % shareholding. It is not enough to sell 99 out of 100 shares - your client would still own 100% of the company.
Is it key that the IP is owned by the company? Why not wind up company and transfer the IP to your client as a winding up distribution? Certainty of capital treatment on cash paid as a winding up distribution.
Leave the cash in
Unless a better option presents itself, leaving the cash in is likely to be okay. The purchaser could extract the cash by dividend or loan with no tax cost (assuming a corporate purchaser). If necessary, the vendor could agree not to be paid this element of sale proceeds immediately but delayed by, say, a day, to give time for the purchaser to extract the cash and pay it on to the vendor.
There are more complex options, e.g. a liquidation demerger, that are beyond the scope of this answer and would need proper advice.