Basically have a small company and two directors who each own 50% of the shares.
One has a sizeable overdrawn loan account and the business cannot support two wages. As such, one has offered to resign and relinquish his shareholding in return for debt being written off. Does the company receive tax relief for this write off and a repayment of section 419 tax suffered to date? Or could it be viewed that the write off represented payment for the outgoing directors shareholding albeit an excessive one? Head is now spinning so any clear thoughts to get me back on track would be greatly appreciated.
Jane
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Relinquish his shareholding?
Exactly what do you mean?
Sounds like a case for own purchase - there should be no difficulty in establishing 'benefit of the trade' purpose.
You indicate that the value of the overdrawn loan account is greater than that of the value of the shares. Therefore, that part of the loan account equivalent to the share value would simply be treated as consideration for the shares. The balance would either be treated as additional consideration or more probably as a distribution in the individual's hands. The company would be entitled to repayment of any 419 tax, but no relief for any part of the loan released (unallowable purpose)
Purchase of own shares
Thanks for that David. The outgoing shareholder/director was suggesting that his shareholding be transferred to the other director/shareholder in return for him being able to walk away from the company and not have to repay his overdrawn directors loan account.
The two directors were keen to resolve fairly quickly but I must confess not to have considered a company repurchase of own shares. Without taking too much of your time, could anyone briefly outline the benefits of going down this route?