Hoping for some help
Mr A Looking to retire and sell his shares in limited company by company buyback.
Of the 165 shares owned, 75 have been owned < 5 years.
Subject to clearance it is my understanding that the value of 90 shares will be taxed as Capital gains, 75 as a dividend.
Obviously dividend rates higher that 10% ER relief.
Could situation be altered if remaing directors of company form new company with sole intention of purchasing leaving directors shares (financed by way of loan). As a third party purchaser could proceeds then be 100% capital gain?
Thanks in advance.
Replies (7)
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Yes
The proposed route will get around the 5 year issue. Presumably you will want Newco to buy all the shares offering shares in Newco in exchange for shares in Oldco to the shareholders who are remaining. By making Oldco a 100% subsidiary, the structure will be simpler going forward and Newco will be the holding company of a trading company rather than an investment company.
But...
... isn't that a transaction in securities? Isn't the exiting shareholder receiving "relevant consideration"?
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Yes, but the good thing is that it will avoid POS and create a 10 % charge rather than some hybrid rate, which I think is the main issue here.
No
Given that all the exiting shareholder's shares are being acquired, there is no reason for HMRC to view this as an artificial transaction in securities and tax it as income (I assume that is what you had in mind). Using a newco to buy out one shareholder is a common route where a purchase of own shares is not available/attractive (shares held less than 5 years as in this case, insufficient distributable reserves or a wish to pay by instalments being the most common reasons). I have used this many times.
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gbuckell,
Just taking this a little further, in your proposal what would the journal entries be in Newco?
Say two reaming shareholders have already created newco having a b/s at £2, represented by cash and £2 OSC.
With the purchase of oldco for say £300k in total, being satisfied with loan of £100k to exiting shareholder and new share subscription of £200k. Would this be entry be:
DR: Investment in shares £300k
CR: loan £100K
CR Share capital £2 (new fresh issue in the exchange)
CR Share Premium £198,998
I was never very good at accounts!
Merger relief
Your solution is one way to do it. However, an alternative would be
DR Investment in shares £100,002
CR Loan £100,000
CR Share capital £2
This applies what I believe is termed merger relief (or is it merger accounting - I can never remember!) to avoid the need to create a share premium account.