Hi all,
Searched but not found info on this one. In a nutshell, i own a company. In my divorce settlement, my Ex wife gt 17.5%, which at that stage was agreed i would buy back within 7 years. We have a good relationship, company is doing well, so i want to get these bought back asap. One accountant advised me to take etra salary to the tune of £60K per year, and give her the money. I would pay tax of about 16k per year on that, she wouldnt pay any. the reason, i could not lower the offer figure, due to my tax burden. i.e. instead of say £350k, offer her £275K. she gets her cash, i pay her out. Now another accountant has suggested that the company buys back the shares monthlyand cancels them off after the whole purchase. If there is a way for me to pay her, without the heavy tax burden, please tell me!
Thanks
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Affordability
So are you saying that there is a set price for these shares that your ex wife is to receive?
Can the company afford to pay that sum in full? If it can then company purchase of own shares does sound like the most sensible way for you to do this. If it can't then the next question is whether payment in instalments is acceptable to the other party, and then, if that is the case you could consider inserting a holding company to buy all the shares in the current company, and issuing you some new shares in exchange for your shares in the current company and creating some sort of debt in respect of amounts owed to your ex wife.
There are a number of connected issues and other issues arising that can't be adequately covered on a forum such as this, and from the sounds of it you might be better running through all of this in greater detail with the second accountant you saw.
Installments are fine. we basically agreed that she can have £5k per month, for abut £325k so 4.5 years. She is happy with all this. I thought that i could offer her £275 due to my tax bill being higher for option 1. Thats when the second company buy back option appeared. We are both happy with the arrangement, the company has a bank loan finishing in April, hence the monthly payout, i am used the the cash going out. It means i dont have to borrow it, so it works all ways. But if the company could buy them, that means i wouldnt pay the extra tax.
Instalments mean that a plain company purchase of own shares won't work as to satisfy the company law requirements the shares need to be paid for in full at the time of purchase so you'll probably want to look at inserting a holding company as I said above. One practicality will be a potential tax bill for your wife as a result of disposing of the shares, that will presumably need to be funded on top of her regular instalments.
Actually, you could do a purchase of own shares
There is no company law reason why you can't buy them all back and have her loan back the balance to be paid out at £5k per month until paid off. But, if you do that, she will pay a shed load of tax herself that she won't thank you for.
There are two options:-
1: The holding company route which James has identified
2: Doing a buyback with staged completion. This gets around both the loan problem and her tax problem - but is complicated and only really to be considered if there is an overriding reason not to use the first solution.
Whichever way you do it, be sure to get clearance from HMRC - and take good quality accountancy advice. It doesn't sound to me like either of the accountants you have spoken to so far has the necessary knowledge / experience.
?
"There is no company law reason why you can't buy them all back and have her loan back the balance to be paid out at £5k per month until paid off. But, if you do that, she will pay a shed load of tax herself that she won't thank you for."
Where does the company get the cash to give her which she then lends back?
Actually that's an interesting point. Perhaps you could persuade someone to give you a bridging loan and the ex wife then becomes the bridging provider's exit route. Might be cheaper in the long run that creating a holding company.
To answer my own question I think that might jeopardise her obtaining capital treatment (if she otherwise qualifies) which would not be in her interests.
If you go down the company buys it own shares route. You will require clearance from HMRC to do so and they will want to know how much the ex-wife would loan back to the company. There are restrictions on how much can be loaned back though I cant remember the exact amounts at present.
http://www.taxation.co.uk/taxation/Articles/2011/10/12/30431/multiple-attraction
Here's an excellent article that contradicts my earlier posts but is hopefully good news for the OP!
Entrpreneurs Relief
If you are on very good terms with your ex-wife if she satisfies the conditions her tax bill on sale could be reduced. I would concur with the advice above that you must get quality accountancy advice.
If you current accountant is not quite there ask him to contact an appropriate firm. You/your business will pay a higher fee but you will be protected by there expertise and Professional Indemity cover
Why not set up an EBT or better a self administered pension scheme and have that buy in the shares, you might then get a tax deduction. There are other arrangements that we could discuss.
Hi all, ok an update now to the issues. I met with accountants last week. Option 1, we take a salary increase to cover the payments. Cost -16K p.a. extra personal tax. Option 2. directors loan. Take a directors loan each year for the 5 years. Interest of 4.75%, plus the 25% payment, cost less tax to the company, and less to me personally. I have to repay on company sale in the future though. The bank has said it will lend us the money to buy the shares back. Good for me, as I can negotiate with a lump sum, but, they have to pay tax? Any way to reduce or minimise the tax here? if she has to pay tax, she will want more of course. as she doesn't actually own the shares, but just an interest in them, she cant own them for the 5 years to benefit from no tax. Any ideas? Thanks.
Personally I think Option 3 is the best
Options 1 and 2 both involve additional tax.
Option 1 means additional NI - both employer's and employee's. Total money exiting the company will definitely be more than option 3.
Option 2 is possibly a bit better, but you have to pay the 25% deposit to HMRC and you also have annual tax cost and Employer's NI on the resulting benefit in kind. Again, in the long run, more cash will exit the company.
On the facts you have given, if it was my company, I'd be going for Option 3.