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Best Way for MD to Sell 70% Shares to Director

MD is looking to Sell 70% Shares to Other Director to Retire. Best way of doing this (please read.)

The MD of our company is looking at retiring and is considering selling 70% shares to the other director who also holds the remaining 30% shares.

Lets assume that the MD and other director have agreed a price for the 70% shares of £400k.

It would be preferable for the company to facilitate purchasing the shares (i.e. use profits from the company to pay for the shares). The MD would look to take c. £150k from the bank as an initial 'payment'. This would leave more than enough working capital so wouldn't impact the business.

My questions are...

1) If the above is do-able, by what means can the MD take the £150k out of the bank to the best tax advantage and

2) What would be the most tax advantageous way (for MD and Comapny/ Director) for paying the remaining £250k to the MD. Bearing in mind this money would come from either profits or directors salary etc.

I assume the remaining £250k could be paid over a number of years (ideally 3-5) but would want the option to pay sooner, if funds / profits allowed.

I have some knowledge of capital gains tax and entrepreneurs relief but not enough knowledge to know how this can be applied to the above scenario.

Any help / advice would be greatly appreciated. 

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21st Oct 2017 06:20

Why doesn’t the outgoing MD seek advice on the options from the company’s accountants?

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21st Oct 2017 09:26

This doesn't look right at all. The other director isn't paying for the shares, are they? From the MD's perspective, what part of the transaction isn't a capital gain? It doesn't look as though this has been thought through.

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to andy.partridge
21st Oct 2017 09:51

andy.partridge wrote:

This doesn't look right at all. The other director isn't paying for the shares, are they?

Instead of paying 70% of the company's value in order to own 100% of it, he will have 100% of a company worth 70% less than it used to be. Tax aside, that seems pretty much the same thing.

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to lionofludesch
21st Oct 2017 09:58

But that isn't the OP's 'plan', is it?

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to andy.partridge
21st Oct 2017 10:04

I believe it is.

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to lionofludesch
21st Oct 2017 12:29

Yes, but as Andy has intimated the surviving director isn't really paying for the shares in a company buy-back, is he? (Or, perhaps more accurately, he's only partially paying). I'll elucidate:

Let's suppose the company's overall net worth is £400,000+ and for simplicity that is 100% liquid funds, all of which is held in distributable profits. Now the surviving director "purchases" the outgoing director's 70% shareholding via the company buy-back we're discussing; and to do so he uses £400k of the company's liquid funds. But he (the surviving director) currently "owns" only 30% of that £400k; in other words, £280k of the £400k receivable by the outgoing director in exchange for his 70% shareholding effectively belongs to him already.

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to I'msorryIhaven'taclue
21st Oct 2017 14:05

No - I'm not grasping this.

Method A - Continuing Director has 100% of company worth £280k plus £400k of his own cash.

Method B - Continuing Director has 100% of a company worth £680k, all locked up in the company.

I say Method A is better but I'm willing to listen to alternative arguments.

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to lionofludesch
21st Oct 2017 14:45

Well the issue I believe Andy was flagging is that if the company uses £400k of its liquid funds to purchase the outgoing director's 70% shareholding, then the surviving director wouldn't be paying £400k for those shares; but would instead be using £280k (£400k x 70%) of funds which effectively belong to the outgoing director already.

So the surviving director would only be paying £120k (£400k x 30%) for complete ownership of the company; not £400k.

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to I'msorryIhaven'taclue
21st Oct 2017 15:19

No - the outgoing director is just taking his 70% from the company's excess funds.

Leaving 30% of the assets to correspond to the continuing director's 30%. Albeit that that 30% is now 100%.

My point is that, although the continuing director has 100% of the company, the company is now only worth 30% of what it was.

So I used to have 30% of 100%, now I have 100% of 30%. I'd say that my position hasn't changed much.

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to lionofludesch
21st Oct 2017 15:24

But the outgoing director already "owns" that 70% of the company's excess funds. I'm not sure why he'd want to regard what already belongs to him as though it's a part-consideration from the ongoing director (because that's the net effect of a buy-back).

The OP was clear on what's being agreed:

TallPaul wrote:

The MD of our company is looking at retiring and is considering selling 70% shares to the other director who also holds the remaining 30% shares.


Lets assume that the MD and other director have agreed a price for the 70% shares of £400k.

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to I'msorryIhaven'taclue
21st Oct 2017 15:34

What you're overlooking is that the outgoing guy just wants £400k, following which he will have no further interest in the company.

No one cares - in principle - whether the continuing guy continues with 30 shares (or whatever number 30% represents) or the full 100. Either way he has 100%.

I don't think I can put it more plainly.

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to lionofludesch
21st Oct 2017 16:23

lionofludesch wrote:

What you're overlooking is that the outgoing guy just wants £400k, following which he will have no further interest in the company.

No one cares - in principle - whether the continuing guy continues with 30 shares (or whatever number 30% represents) or the full 100. Either way he has 100%.

I get the second part - the number of shares is irrelevant; and he'll own 100%.

It's the first part that bothers me: we're told he's selling his share of the company to the remaining director for £400k. But a buy-back would mean the remaining director doesn't pay £400k or anywhere near it - not if he's using the company funds (to which the outgoing director is already entitled to 70%).

I'll flex that to make it a little plainer: the OP envisages that the outgoing director can have £150k immediately without disturbing the company's working capital too badly. But he's not receiving £150k consideration from the remaining director, because £105k (70% of £150k) is a "distribution" to which he is presently already entitled. The remaining director would be using £105k of the outgoing director's "assets" as a contribution to his, the remaining director's, £400k consideration. Surely that's not what's intended? It's certainly not what the OP told us.

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to I'msorryIhaven'taclue
21st Oct 2017 17:11

I'msorryIhaven'taclue wrote:

I'll flex that to make it a little plainer: the OP envisages that the outgoing director can have £150k immediately without disturbing the company's working capital too badly. But he's not receiving £150k consideration from the remaining director, because £105k (70% of £150k) is a "distribution" to which he is presently already entitled. The remaining director would be using £105k of the outgoing director's "assets" as a contribution to his, the remaining director's, £400k consideration. Surely that's not what's intended? It's certainly not what the OP told us.

Not at all. He's converting his 70% shareholding into cash/loan. The £150k is all his. So is the £250k loan, as and when it's paid.

In return, he no longer has a shareholding.

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to lionofludesch
21st Oct 2017 17:41

lionofludesch wrote:

Not at all. He's converting his 70% shareholding into cash/loan.

But we were told by the OP the retiring director had agreed to sell his shares to the surviving director for (a supposed) £400k.

lionofludesch wrote:

The £150k is all his.

£105k of which is already his.

lionofludesch wrote:

In return, he no longer has a shareholding.

Yes, and in exchange for his shares he'll have received an additional £120k over and above the share of the company's assets (ie 70% of £400k) that he is presently entitled to. Not £400k, but £120k.

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to I'msorryIhaven'taclue
21st Oct 2017 17:53

£400k is the agreed price of the 70% holding.

Not the value of the company.

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to lionofludesch
21st Oct 2017 18:08

lionofludesch wrote:

£400k is the agreed price of the 70% holding.

Sure, and I'm highlighting the difference I think Andy was alluding to: that £400k payable by the surviving director is a quite different amount from £400k payable by the company in a buy-back (the latter would amount to just £12ok cost to the surviving director, being 30% [his share of the company's current equity] x £400k).

lionofludesch wrote:

Not the value of the company.

Agreed, that would be £400k x 10/7ths

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to I'msorryIhaven'taclue
21st Oct 2017 18:17

Does it ?

If the company buys the shares back, the remaining director has a company worth (3/7 of £400k) say £170k.

If the director buys the shares, he has a company still worth (10/7 of £400) £570k, less the £400 he's had to fork out of his own money to buy the shares - nets out to £170k.

Any difference is going to be in the tax treatment.

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to lionofludesch
21st Oct 2017 18:55

lionofludesch wrote:

Does it ?

If the company buys the shares back, the remaining director has a company worth (3/7 of £400k) say £170k.

Agreed. And £170k is also the value of his present shareholding (£570k x 30%).

And would you agree that the true cost to the surviving director, ignoring tax, would amount to £120k? (Why? Because his equity share of the £400k consideration being paid by the company amounts to 30% of that £400k)

lionofludesch wrote:

If the director buys the shares, he has a company still worth (10/7 of £400) £570k, less the £400 he's had to fork out of his own money to buy the shares - nets out to £170k.

Agreed. So once again the net true cost to the remaining director must be the same £120k.

And what I'm highlighting is that, looked at from the viewpoint of the seller, the departing director is receiving just £120k for his 70% shareholding, and not £400k.

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to I'msorryIhaven'taclue
21st Oct 2017 18:05

I'msorryIhaven'taclue wrote:
lionofludesch wrote:
The £150k is all his.

£105k of which is already his.

The whole £150k is already his.

He's selling his shares and taking his cash instead.

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to lionofludesch
21st Oct 2017 18:59

lionofludesch wrote:

The whole £150k is already his.

He's selling his shares and taking his cash instead.

Hmm if it's already his then he might just as well not sell his shares and still take his cash. Then he'd have both the penny and the bun.

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to I'msorryIhaven'taclue
22nd Oct 2017 11:10

OK - why do you think the continuing shareholder needs to pay anything to anyone ?

What has he bought ?

He's received no value.

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to lionofludesch
23rd Oct 2017 10:56

lionofludesch wrote:

OK - why do you think the continuing shareholder needs to pay anything to anyone ?

What has he bought ?

Well the answers to those questions are in the OP's original post:

TallPaul wrote:

Lets assume that the MD and other director have agreed a price for the 70% shares of £400k.

We're also told a company buy-back of its (70%) shares is preferable:

TallPaul wrote:

The [departing] MD would look to take c. £150k from the bank as an initial 'payment'. This would leave more than enough working capital so wouldn't impact the business.

What would be the most tax advantageous way (for MD and Comapny/ Director) for paying the remaining £250k to the MD. Bearing in mind this money would come from either profits or directors salary etc?

And to hone in on the point I'm making:

lionofludesch wrote:

He's received no value.

He [the surviving director] receives ownership of the entire company and its assets; and it will only have cost him £45k (being his 30% equity share of the £150k the company will hand over to the outgoing MD).

That's the fishy whiff I believe Andy was alluding to: he [the surviving director], would be using the outgoing MD's existing 70% share (£105k) of the company's equity towards payment of the MD's £150k consideration. Ditto for the £250k future payment: although to a lesser extent possibly, as we're told of the additional and separate complication that perhaps only some of that latter instalment will come from existing working capital (because we're told that, in order to maintain its present working capital levels, some of that £250k may be funded by future profits).

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to I'msorryIhaven'taclue
23rd Oct 2017 11:38

The continuing director has bought nothing. He's has 100% of the company but it's a company which is a shadow of its former self. It has £150k less cash and a £250k loan.

You need to think of this as a Christmas Club. Director A has £400k in it and Director B has £170k in it. Director A withdraws his £400k, Director B leaves his £170k in.

Stay away from companies buying their own shares until you think this through.

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to lionofludesch
23rd Oct 2017 13:04

lionofludesch wrote:

You need to think of this as a Christmas Club. Director A has £400k in it and Director B has £170k in it. Director A withdraws his £400k, Director B leaves his £170k in.

Their Christmas Club clearly doesn't have £570k in it; which rather gets in the way of any buy-back. But I'll raise my glass to your sentiment anyway.

We're leaping merrily about in this argument, but (notwithstanding the apparent shortfall of distributable funds) the holistic picture remains that the departing director receives nothing like the agreed £400k consideration he might reasonably expect. Instead he receives an additional £45k (being 30% of £150k) over and above the equity share he is already entitled to (ie 70% of that £150k); with the balancing £250k (or at least a sizeable chunk of it) contingent on anticipated future profits. That's all.

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to I'msorryIhaven'taclue
23rd Oct 2017 13:29

I'msorryIhaven'taclue wrote:

lionofludesch wrote:

You need to think of this as a Christmas Club. Director A has £400k in it and Director B has £170k in it. Director A withdraws his £400k, Director B leaves his £170k in.

Their Christmas Club clearly doesn't have £570k in it; which rather gets in the way of any buy-back. But I'll raise my glass to your sentiment anyway.

Not in cash, perhaps.

But if we take £400k to be a fair value of 70% of the company (and we have no better information), it does in asset value.

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to I'msorryIhaven'taclue
23rd Oct 2017 13:36

I'msorryIhaven'taclue wrote:

lionofludesch wrote:

You need to think of this as a Christmas Club. Director A has £400k in it and Director B has £170k in it. Director A withdraws his £400k, Director B leaves his £170k in.

We're leaping merrily about in this argument, but (notwithstanding the apparent shortfall of distributable funds) the holistic picture remains that the departing director receives nothing like the agreed £400k consideration he might reasonably expect. Instead he receives an additional £45k (being 30% of £150k) over and above the equity share he is already entitled to (ie 70% of that £150k); with the balancing £250k (or at least a sizeable chunk of it) contingent on anticipated future profits. That's all.

He had shares worth £400k.

Now he has £400k.

How has he not received full value?

Think before you post.

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to lionofludesch
23rd Oct 2017 14:31

lionofludesch wrote:

He had shares worth £400k.

Now he has £400k.

Now he has £150k (£45k from the surviving director & £105k that he was already entitled to). He also has an iou for £250k.

lionofludesch wrote:

How has he not received full value?

For me he's missing a director's personal guarantee for the £250k from the surviving director.

Otherwise, always assuming the company has sufficient distributable reserves to effect a buy-back, he [the MD] might be better advised to avoid the proposed risk and the delay in payment (although maybe not the tax) by simply withdrawing his full wedge now instead.

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to I'msorryIhaven'taclue
23rd Oct 2017 14:48

I thought you were arguing over the numbers (in which regard I agree with Lion).

If you are merely recommending additional conditions/indemnities/guarantees, I agree with you. You could have said that up front and saved a lot of time.

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to Tax Dragon
23rd Oct 2017 15:16

Lion paid for the full argument (that was never five minutes!)

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to I'msorryIhaven'taclue
23rd Oct 2017 15:42

Now I see why Monty and the gang did not broadcast the full half hour version! :-P

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to Tax Dragon
23rd Oct 2017 15:28

Actually, I agree with Lion over the numbers. I didn't at first, because there seemed something fishy in the surviving director substantially using the retiring director's equity funds to pay off the retiring director; not to mention getting him, the retiring director, to effectively loan substantial sums to the company.

But the Christmas Club analogy convinced me it's not the numbers, but the deal itself that's slightly whiffy. Anyone for a phased withdrawal?

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to I'msorryIhaven'taclue
23rd Oct 2017 16:48

I'msorryIhaven'taclue wrote:

Now he has £150k (£45k from the surviving director & £105k that he was already entitled to)

When you have 70% of the shares in a company you don't own 70% of each and every asset and you're not liable for 70% of each and every liability. Your italicised text is a nonsense. In truth, it's at the heart of your misconception.

Quote:

For me he's missing a director's personal guarantee for the £250k from the surviving director.

First time anyone's mentioned this - completely separate issue from what's been discussed. I'm not sure why the continuing director would need to do this. He's not bought anything, has he ?

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to lionofludesch
23rd Oct 2017 16:45

Not bought - but he has acquired. Control of the company, for starters.

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to Tax Dragon
23rd Oct 2017 16:53

Well, as I pointed out earlier, the company is not what it was.

He now "owns" 100% of 30% of the original value.

He used to "own" 30% of the whole.

Personally, I wouldn't see that as acquiring much value.

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to lionofludesch
23rd Oct 2017 17:07

Forget the ongoing director/shareholder. S/he can look after his/her own assets. Or maybe s/he can't... in which case the now-retired d/s loses out and does not get (to keep) the £400k you say s/he has.

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to Tax Dragon
23rd Oct 2017 17:17

If that's a condition of the deal, so be it.

It's up to the directors to agree terms between themselves.

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to lionofludesch
23rd Oct 2017 17:32

Of course. And I'msorryIhaven'taclue ended up recommending that those terms include a personal guarantee. Doesn't sound so outrageous.

Entertaining as your automatic gainsaying with said participant was (at least, for the first five minutes) I note that John gave the best answer right at the start: those involved should take advice.

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to Tax Dragon
23rd Oct 2017 17:40

Sadly, none of our "debate" was helpful to the OP, I would imagine.

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to lionofludesch
24th Oct 2017 10:15

Tax Dragon wrote:

I note that John gave the best answer right at the start: those involved should take advice.

I also liked Andy's this doesn't look right post.

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to lionofludesch
24th Oct 2017 10:18

lionofludesch wrote:

I'msorryIhaven'taclue wrote:

Now he has £150k (£45k from the surviving director & £105k that he was already entitled to)

When you have 70% of the shares in a company you don't own 70% of each and every asset and you're not liable for 70% of each and every liability. Your italicised text is a nonsense. In truth, it's at the heart of your misconception.

Good morning Lion.

I've made a reasonable assumption that the £150k cash that is to be paid immediately to the retiring MD would otherwise (ie in the absence of any such retirement or share transfers) be distributable in proportion to the existing shareholding 70% / 30%.

I'm not sure why you have called that a "nonsense". Or was it the italics that set you roaring?

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to I'msorryIhaven'taclue
24th Oct 2017 10:26

I refer you to the Christmas Club analogy.

Mr Retire has £400k upon which he can draw. Mr Continue has £170k (ish)

After Mr Retire's withdrawn his money, Mr Continue still has £170k upon which he can draw.

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to lionofludesch
24th Oct 2017 10:52

You're filibustering! We've already settled the numbers.

To paraphrase Andy, this agreement still doesn't look right. The "Christmas Club" has all the appeal of Farepak.

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to I'msorryIhaven'taclue
24th Oct 2017 11:04

Less cash doesn't mean less wealth.

If I have a creditor for £100 and pay him, I have £100 less cash. My wealth is unaffected.

Similarly, Mr Retire withdrawing £150k doesn't affect Mr Continue's wealth. It has cost him nothing. His holding in the company remains at £170k.

This is simple stuff.

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to lionofludesch
24th Oct 2017 12:33

I think it's a great deal from Mr Continue's viewpoint.

It's Mr Retire who's joining the Farepak Christmas Club.

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to I'msorryIhaven'taclue
24th Oct 2017 13:32

Mr Continue is indifferent. He had £170k in assets. He still has £170k in assets.

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to lionofludesch
24th Oct 2017 15:50

Mr Continue should be elated. Not only would he have acquired 100% of the company's most valuable assets, its ordinary shares, but he would have done so using £105k of Mr Retire's own equity share of liquid funds and a potentially toxic £250k Christmas Club voucher.

If I were in Mr Retire's shoes I'd only be parting with 3/8ths (£150k/£400k) of my shares at this juncture, regardless of how often someone told me "You had £400k of assets [shares]; and you still have £400k of assets [£150k cash and a £250k Farepak voucher]".

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to I'msorryIhaven'taclue
24th Oct 2017 16:40

Mr Retire is chuffed to bits.

He got the deal he asked for.

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to lionofludesch
24th Oct 2017 17:07

Except, like your Aunts' piano, it comes with strings.

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By Matrix
21st Oct 2017 09:50

Provided he has held the shares for more than 5 years then the (whole of the) buyback should be subject to CGT with ER if conditions are met. Otherwise income tax would apply. Then the company pays the £400k in an agreed timeframe, I don't really know what you mean about the most tax efficient way of extracting the cash.

A buyback is not buying the shares from the other shareholder, it is the company buying the shares, as you say, out of distributable profits (which would have to exceed £400k on the day of the buyback).

There is a lot of paperwork and the MD would probably need terms should the company be unable to pay the rest of the money for the shares. I would refer him to a lawyer.

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to Matrix
21st Oct 2017 12:14

Isn’t there a requirement for the whole consideration to be satisfied on completion for capital treatment to apply for tax?

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