Selling part of my own company's share

Selling part of my own company's share

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I am a sole director and 100% shareholder of the company (100 shares with nominal value of £1.00 each). A potential business partner is interested in investing in my company.

At this stage I worked out that I spent (invested) approximately £45.000 of personal money in the company (as director loan), plus 1 year of my time. I'm willing to offer 40% of the shares for £22000, what's the easiest way to finalise this in terms of accounting and tax savings?

Replies (49)

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By johngroganjga
18th Nov 2013 10:49

Are you saying the incoming shareholder will pay you £22,000 for your shares and your loan of £45,000 to the company will remain intact, and be available to you to withdraw in future?

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Replying to PERMON:
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By [email protected]
18th Nov 2013 11:03

thanks for your reply,

The incoming shareholder will pay £22,000 to me in return of 40 shares and director loan will be reduce to £23K. 

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By johngroganjga
18th Nov 2013 11:07

How will the director's loan reduce from £45,000 to £23,000?  Will you be transferring the right to receive £22,000 of it to the new shareholder, or will £22,000 of it cease to be payable to anybody? 

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By [email protected]
18th Nov 2013 11:29

I want to get £22K back from

I want to get £22K back from my initial investment . Please advise what is the best way to do it.

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By johngroganjga
18th Nov 2013 11:46

So you want to end up with:

So you want to end up with:

£22,000 in cash outside the company, with as little tax to pay as possiblea 60% shareholding in the companya £23,000 loan account balance in the company

... ?

New shareholder pays £22,000 cash in exchange for:

a 40% shareholding in the companya £22,000 loan account balance in the company

... ?

Is that the deal you have in mind?

   

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By [email protected]
18th Nov 2013 11:50

£22,000 in cash outside the
£22,000 in cash outside the company, with as little tax to pay as possiblea 60% shareholding in the companya £23,000 loan account balance in the company

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By [email protected]
18th Nov 2013 11:51

New shareholder pays £22,000

New shareholder pays £22,000 cash in exchange for:

a 40% shareholding in the companya £23,000 loan account balance in the company

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By [email protected]
18th Nov 2013 11:52

Yes this a deal I have in my  mind

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By User deleted
18th Nov 2013 11:53

Doesn't add up

Your director's loan has nothing to do with the transaction between you and the incoming shareholder.

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By johngroganjga
18th Nov 2013 11:56

So you're prepared to transfer 40% of your shares in the company in return for the new shareholder agreeing:

to lend £22,000 to the company (on terms to be agreed)to allow you immediately to withdraw £22,000 of your £45,000 loan.

This makes sense if the shares themselves are of negligible value.  Is that the case?

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By [email protected]
18th Nov 2013 11:59

Yes, this is the case.

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By johngroganjga
18th Nov 2013 12:06

Then:

Get loan agreement between the incoming shareholder and the company drawn up and agreed (you don't want him ruining the company by asking for his money back on day 2).  He may want you to enter into agreement in relation to your loan on the same terms - but that is for him to suggest not you.

Then you transfer shares to him for £1 in total (which you say is what they are worth).

He puts £22,000 into the company's bank account and you take £22,000 out.

There will be no tax consequences of the above transactions. 

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Replying to Moshinmiah:
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By [email protected]
18th Nov 2013 12:14

Many thanks,

Do you have any loan agrreement template that I can use for this purpose.

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Replying to johngroganjga:
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By RussG
03rd May 2022 09:22

I really appreciated your input to this thread @johngroganjga as I have been trying to help get my son out of a pickle following the liquidation of his business. He has been left with quite a large DL which the liquidators are demanding he pays back, even though he has lost everything. That aside, I needed to get to the bottom of how this situation occurred and why it was the his DL account did not reflect the sale of a 40% share of the company he owned outright, which led me to this very useful, if not quite old thread. Whilst his situation was very similar to the OP, the difference in my son's situation is that the incoming investment was required for expansion and therefore it was not possible to withdraw any money, as the company accounts would have been back to square one if he had withdrawn it (ie. no cash for the planned expansion of the business). I am not an accountant, so apologies in advance should this be a daft question. Would it have been in order for him to have proceeded as you outlined, but then to have paid the money back into the company bank account and credited as an equal sum to his own DL account? The amount was £30k, which would almost wipe out what he has outstanding.

Thanks in advance.

johngroganjga wrote:

Then:

Get loan agreement between the incoming shareholder and the company drawn up and agreed (you don't want him ruining the company by asking for his money back on day 2).  He may want you to enter into agreement in relation to your loan on the same terms - but that is for him to suggest not you.

Then you transfer shares to him for £1 in total (which you say is what they are worth).

He puts £22,000 into the company's bank account and you take £22,000 out.

There will be no tax consequences of the above transactions. 

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Replying to RussG:
Stepurhan
By stepurhan
03rd May 2022 10:21

This thread is 9 years old. You would be better starting a new thread.

For starters, the sale of 40% of the company and the DL account are unlikely to be connected. Sale of shares in a company are not an accounting transaction for the company itself. There is no reason for that sale being contained in the company records on its own.

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Replying to stepurhan:
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By RussG
03rd May 2022 17:11

Thanks for replying, and I'm sorry, but I couldn't see how to start a new thread and as this old one was so similar to my sons situation, it seemed logical to hijack it.

Apologies again.

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Replying to RussG:
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By Tax is always taxing
03rd May 2022 11:40

Did the company issue new shares for this inward investment? If yes then nothing to do with DLA.

If no, and your son sold his shares to the individual personally for £30k (which I assume he can prove by showing his tax return declaring the capital gain?) but the money went direct into the business instead then yes, there is an argument that this should be shown in his DLA.

But it's somewhere - if the money went into the company bank account, what was the 'other side' of the transaction? So bank account was debited with £30k - what was credited? (was it the other Directors DLA instead?)

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Replying to Tax is always taxing:
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By RussG
03rd May 2022 17:05

Many thanks for taking the time to respond.

No new shares were issued for this inward investment.

Whilst the agreed personal sum was £30k for the investment, the informal agreement was for all this money to be used to expand the business. Neither the Business Bank Account nor my son ever received the money, as his new business partner purchased new equipment on behalf of the company using his personal bank account, and then credited the expenditure to his DLA, but nothing to my sons.

I have a sinking feeling that my son has been extremely naive and is now saddled with debt he cannot repay (the company is in the hands of liquidators who are chasing him for repayment of his DLA, which curiously is about £30k), perhaps as a result of some jiggery pokery with the books, which the co director took full control of on day one of his appointment. His co-director, of course, has a much smaller DLA, even though he took out a lot more.

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Replying to RussG:
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By Tax is always taxing
04th May 2022 10:27

Well unfortunately the transactions above don't support the view that there was an invstment. Merely that the incoming director loaned the company £30k to purchase some new assets.
Who did the share transfers for your son? Does he have copies of the stock transfer forms - and what was the consideration?
I suspect this sounds like a bodged self done procedure - but you would have hoped his accountant at the time should have advised of the issues.
Its now a legal issue more than an accounting one if he wants to contest the entries - but it would help to have some/any supporting paperwork.

p.s. most liquidators are usually open to 'reasonable' offers on these types of things (which can be a lot less than £30k!!)

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Replying to Tax is always taxing:
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By RussG
04th May 2022 11:07

Once again, thanks so much for your input.

I had pretty much expected this to be the case and I think you are absolutely correct about it being a bodged self done procedure. Two "mates" who got into business together, sadly with one possibly being smarter than the other. I would like to believe there was no criminal intent, but I feel they may be a case to bring against the accountants, but that of course very much depends on what they were told at the time.

My son needs to get the liquidators off his back, so I think he should give them the background (not that it is their concern, as it isn't an accounting matter), and as my son is now a "man of straw" with no assets and other debts to boot, they'll have to hammer out a repayment plan over xx years. I think it unlikely they'll file a personal bankruptcy order, as he literally has nothing to offer and my understanding is to do that would cost the liquidator even more money, so throwing good after bad.

Thanks again for your insight, it has been really most helpful.

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Replying to RussG:
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By Tax is always taxing
04th May 2022 11:30

If he really has no assets, then be upfront with the liquidator on this, don't jump in and agree any repayment plan, he may not have to pay anything at all.
He's probably at the stage of taking personal debt advice now.

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Replying to Tax is always taxing:
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By RussG
04th May 2022 13:21

Excellent advice. Thank you. He literally owns nothing and the Bank of Dad has run dry!

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Replying to RussG:
By tonyaustin
04th May 2022 10:53

You need to find out exactly what happened with the transfer of shares, if any, and the new investment. You will need to have all the company records (accounting records, share register, accounts, Companies House filings etc.) checked carefully. Also check any correspondence between your son and the other investor. You may then need professional advice to analyse and explain it all.

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Replying to tonyaustin:
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By RussG
04th May 2022 11:19

Thank you Tony.

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Replying to RussG:
By johngroganjga
05th May 2022 11:26

RussG wrote:

the company is in the hands of liquidators who are chasing him for repayment of his DLA, which curiously is about £30k, perhaps as a result of some jiggery pokery with the books

None of the transactions you describe with the incoming director will have impacted on the balance on your son's loan account with the company. Why on earth do you suggest there has been jiggery pokery? Do you mean that your son does not agree that all the debits on his loan account are payments by the company to him or to third parties on his behalf? If so, that is what needs to be dealt with.

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Replying to johngroganjga:
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By RussG
05th May 2022 12:10

I appreciate your comments John, although upon re-reading my comments, I think what I really meant was any jiggery pokery happened outside the books, which had the effect of flipping a credit to the new directors DLA, with my son receiving absolutely £0 for giving up 40% of the company he owned. My assumption, which may well be wrong, is that if he had personally received the £30k agreed with the incoming director to sell a share of the business and my son had then paid that money into the company, it would have been credited to his DLA and not the new directors DLA. Does that make sense?

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Replying to RussG:
By johngroganjga
05th May 2022 12:27

.

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Replying to RussG:
By johngroganjga
05th May 2022 12:27

You said that the new director had bought assets for the company. If he did then the credit to his loan account is only right and proper isn't it? In any case, it has no impact on your son's loan account.

You are not being clear about whether your son sold any shares to the new director, and if so for how much? Is your son's problem that he never received the agreed sum for such a sale, and that it remains outstanding?

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Replying to johngroganjga:
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By RussG
05th May 2022 15:33

I apologise for not making myself clear, and as a layperson (not an accountant), I realise my explanation of the circumstances are probably confusing matters further. I will attempt to clarify.

1. My son owned 100% of the company. Nominal Share Value of £100 (100 shares)
2. Single location operation.
3. Achieved t/o in year 1, prior to sale of part of his share, of c£250,000
4. Expansion opportunity to obtain 2nd location. Investment required.
5. New director agreed to pay £30k to the sole shareholder (my son) for 40% of his holding, subject to the £30k being invested by my son for the expansion of the business.
6. For reasons best known to the new director/shareholder, he paid for new equipment and paid some other o/s invoices and deposited £5k from his personal bank account, into the company account, all of which totalled £30k and was reflected in his DLA as a £30k credit
7. Nominal shares re-allocated on a 60/40 basis and filed with Companies House
8. The new director subsequently drew down on the credit he had in his DLA, effectively taking back the £30k and then taking his DLA into debit
9. My son received nothing personally, other than a £40 adjustment in his DLA, for passing 40% of his company to the new shareholder.

If the new director had solely invested the money, I can understand why his DLA would have been credited. However, he took a 40% share ownership of an existing profitable business for which he paid only £40, when the agreement was to pay £30k for the stake, but conditional on 5. above.

I can see this is not an accounting issue, but potentially a legal one, which may or may not come about, depending on what the liquidators have to say about this sequence of events. My son has zero in assets, so no chance of paying off his DLA any time soon. The other director however owns a house, 2 cars and had money in the bank (curious that!) and it is his DLA that should have carried this £30k debt, not my sons. They'd have a much better chance of recovering the debt from him, who appears to have been the cause of it in the first place.

What am I missing?

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Replying to RussG:
By tonyaustin
06th May 2022 13:09

Based on these facts, it sounds as though the accounting for the transactions is wrong. You should employ an accountant to check the records and provide the facts and correct records to the liquidator. If you son sold 40 shares for £30k, he is owed £30k by the purchaser. If the £30k was paid to the company by the new shareholder, he is investing your son's money for him. The company now owes your son £30k, which should cancel the debit balance on your son's DLA. If the other shareholder withdrew £30k, then it would appear that he owes the company the money. Resolving this will depend on having evidence for the facts you have stated and checking the records held by the liquidator. It may help to contact him and give him your son's version of what happened. The accounts seem to have been prepared on the basis that your son sold his shares for £40 and the new shareholder made a loan of £30k to the company. Who approved the accounts, assuming they were ever completed or is this just the way the transactions were entered in the company's books, which may be incorrect?

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Replying to tonyaustin:
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By RussG
06th May 2022 13:54

Many thanks Tony. That's exactly how I had understood the situation, but not being an accountant myself, it is re-assuring to read you are of the same opinion of the accounting transactions being wrong.

This version of events has been sent to the liquidator, and it will be interesting to learn of their views on the matter.

Thanks again.

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Replying to RussG:
By tonyaustin
09th May 2022 11:55

If your son originally paid £40 for the shares and sold them for £30,000, he has a capital gain of £29,960. After deducting the annual exempt amount for that year of sale, he is liable for capital gains tax at 10% or 20%, depending on his total taxable income for the year. He may also be liable to interest and penalties for failing to report this gain to HMRC at the proper time.

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By johngroganjga
18th Nov 2013 14:40

Afraid not.  That is a matter

Afraid not.  That is a matter for a lawyer.

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By Mikolaj
20th Nov 2013 13:47

Lawyer?

Solicitor, please.

 

John your advice as usual is excellent, however, this such relatively simple loan agreement can be drawn up independently, no need for the cost of a solictor.

 

By golly, they charge more than we do!

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By johngroganjga
20th Nov 2013 14:06

Well I wouldn't do it!

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By tonyaustin
20th Nov 2013 14:58

Another way

If the company issues 66 new shares to the incoming investor for £22,000 cash, he will have 40% and you will have 60%.

The company then repays you £22,000 of your loan leaving a balance of £23,000.

I am assuming this is arrm's length between unconnected persons.

It means you have given away 40% of your company in order to get back some of the money it owes you, which you could have got back as soon as the company could afford to pay you. If the company cannot afford to repay the loan, why is someone prepared to pay £22,000 for 40%?

Alternatively, you could sell 40% of your shares to the investor for £22,000 and still be owed £45,000 by the company. The CGT should be quite low if Entrepreneur's Relief and the Annual Exempt Amount apply - 10% of (22,000-10,900) = £1,110.

 

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By johngroganjga
20th Nov 2013 15:04

But Tony this achieves a different result from what OP said he wanted.  It's not another way of achieving the same result.  The desired result is that the new shareholder ended up with a £22k loan account balance.  But your way that's locked up in share premium and therefore not available to him! 

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By Ange
20th Nov 2013 16:09

Is it just me???

Is it not simply the case that A is selling 40% of his shares for £22000? Thus the £22k never hits the company, the seller will have a capital gain circa £11400 (assuming no other gains or losses in year), entrepreneurs relief can probably be claimed (subject to the usual conditions) and his loan account balance is unaffected by this transaction.

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Replying to coachmaster:
By johngroganjga
21st Nov 2013 11:09

Misunderstand

Ange wrote:

Is it not simply the case that A is selling 40% of his shares for £22000? Thus the £22k never hits the company, the seller will have a capital gain circa £11400 (assuming no other gains or losses in year), entrepreneurs relief can probably be claimed (subject to the usual conditions) and his loan account balance is unaffected by this transaction.

No - he is selling shares for £1, as (he says) they have no value, so questions of capital gains / entrepreneur's relief etc. do not arise.

His loan account is not unaffected.  He withdraws £22,000 of it, and this is matched by the new shareholder lending £22,000 to the company on agreed terms. 

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By richardterhorst
21st Nov 2013 09:56

Free advice forum now?

The question I have, is this forum now for clients getting free advice instead of them going to their own accountant?

But the subsequent discussion is interesting and is what the forum is for surely?

 

 

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By Mikolaj
21st Nov 2013 15:12

Understanding the issue

I agree with John's advice on this. This is the correct action to take for the company director/shareholder. The loan is maintained, but now split 23/22 twixt the old and new lenders.

This has to be the logical approach.

 

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By Ange
23rd Nov 2013 13:27

You are putting words in OPs mouth
Johngroganjga, at no point does the OP say shares are worth £1, he says that's the nominal value. And he says he is "willing to sell 40% of shares for £22000" thus it's a sale of shares with attendant CGT. You are the one who suggests selling shares for £1 and the "purchaser" loaning money to the company. This could be viewed as CGT avoidance ( and stamp duty avoidance) and was certainly not the OPs original description of the scenario.

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Replying to Ruddles:
By johngroganjga
23rd Nov 2013 15:01

Not true

Ange wrote:
Johngroganjga, at no point does the OP say shares are worth £1, he says that's the nominal value.

I think you have overlooked OP's post at 11.59 on 18.11.13 where he does indeed say in terms that it is the case that the value of the shares, in his opinion of course, is negligible.  Hence I suggest a nominal value of £1 be put on the transaction.

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David Winch
By David Winch
23rd Nov 2013 14:27

Clarification?
I am not sure the OP realises that the deal proposed would allow the purchaser of the shares to get his money back without selling his 40% of the company (because he is only paying £1 for the 40% shareholding).

I suspect the OP does not understand the implications of the deal he may be doing.

The best advice is for the OP to get face to face professional advice from an accountant and / or a solicitor.

David

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David Winch
By David Winch
23rd Nov 2013 15:22

My concern is that the OP perhaps thinks that the company is worth £45,000 because he has invested £45,000 in it. On that basis he is prepared to sell a 40% shareholding for £22,000 and he expects to receive that £22,000 himself.

But his accountant may have prepared accounts showing a directors loan account balance of £45,000. In an accountant's view the company is worth nothing, since it owes £45,000 to the OP.

On that basis John is correct to suggest that the shares have no value, which the OP has agreed (but I am not sure the OP fully understands the implications of that).

The 'remedy' I suggest is for the OP to get professional advice face to face, and on that basis to draw up a proper agreement with the investor to prevent him introducing and then almost immediately withdrawing his 'investment' of £22,000 but retaining a 40% ownership of the OP's company.

I do apologise if I have underestimated the OP's knowledge of accountancy and company law issues.

David

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By johngroganjga
23rd Nov 2013 15:48

Agreed

I agree David.  That is precisely why my first piece of advice (see my post at 12.06 on 18.11.13) was to get a proper loan agreement drawn up to prevent precisely the eventuality you warn about.

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David Winch
By David Winch
23rd Nov 2013 15:51

@John
Yes, absolutely. (But others suggested this would be OTT!)

David

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By mickeyparish
02nd Dec 2013 12:25

Entrepreneur's relief

Correct me if I'm wrong, but ER is not available to an owner who stays on , i.e. doesn't retire and sell up.

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Replying to SteveHa:
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By User deleted
02nd Dec 2013 12:33

Correction

mickeyparish wrote:

Correct me if I'm wrong, but ER is not available to an owner who stays on , i.e. doesn't retire and sell up.

You are wrong (in the context of this thread)

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