Buying shares in a limited company

Can you just 'pay what you like'?!!

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I've got a client who has run a limited company for the past two years; initially there were two directors/shareholders now there is just him as the sole director and shareholder.

The company is solvent but its net assets are worth no more than around £5k. The director has 1000 shares of 10p each making up the £100 nominal issued share capital of the business. His parents want to invest £20k into the business - in return for 20 shares (ie at £1k each). This seems to end up causing more issues than its worth so I've suggested just lending their Son the money but they want to have the shares. Can they purchase 20 shares at that valuation (despite the fact that they're obviously not worth that much) or does this disparity open a whole can of worms?

Any assistance gratefully received thanks as not come across quite this scenario in the past!

Replies (22)

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By Ruddles
18th May 2017 15:39

If they want to buy shares worth £1 for £10m there's nothing to stop them doing so. But fools and their money ...

Talking of fools, why on earth would you think that lending to the son is a good idea?

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Replying to Ruddles:
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By Southwestbeancounter
18th May 2017 16:13

Only thought that lending to the Son was a better idea because that is technically all they really want to do as they have spare cash, he doesn't, so I thought they were technically muddying the waters so to speak and complicating things unnecessarily.

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Replying to Southwestbeancounter:
By Ruddles
18th May 2017 16:18

You didn't consider lending directly to the company?

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Replying to Ruddles:
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By Southwestbeancounter
18th May 2017 16:49

Yes that was what I meant - lending to the Son via his limited company that he is the sole director/shareholder of.

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Replying to Southwestbeancounter:
By Ruddles
18th May 2017 17:22

Well, please say what you mean. It makes the analysis so much easier. Although the son may not understand that he and his company are separate legal entities I do hope that you appreciate the distinction.

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Replying to Ruddles:
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By Southwestbeancounter
18th May 2017 18:14

Sorry Ruddles - point taken - got a migraine today so that's my excuse for being a numpty in that respect!

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By Ruddles
18th May 2017 18:16

In which case you have my sympathy. I don't suffer directly, but my husband does (and, as a consequence, so do I).

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Replying to Ruddles:
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By Southwestbeancounter
18th May 2017 18:32

Thanks Ruddles - started as a headache last night which I thought I could sleep off but it had other ideas so I woke up with a migraine! The tablets are starting to kick in now but a good nights sleep will probably be what's really needed!

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Replying to Ruddles:
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By Southwestbeancounter
18th May 2017 18:15

Deleted as duplicated above

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By Democratus
18th May 2017 15:46

Yes you can pay what you like, but there must be more to this than is apparant from the original post.

Why were there more issues than it was worth? A proper class of share issue could settle most issues: assuming control, dividend rights or conversion / redemption to be the main ones.

Tax? - way outside my field.

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Replying to Democratus:
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By Southwestbeancounter
18th May 2017 16:18

Basically parents who had spare cash wanting to 'invest' it in their Son who had none and needed cash for investment as simple as that. I suppose the overvaluation just follows the 'blood is thicker than water' scenario - they would go to great lengths to help their Son, I just felt that simply lending him the money might have been more straightforward all round as that is technically what they are doing but in a round about way.

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paddle steamer
By DJKL
18th May 2017 16:03

The only tax issue I can think about is might overpaying for shares be considered a gift by the patents for IHT purposes? Someone better versed might comment.

Other than that struggling to see any real issues, then again not really thought it through and by 4.00 p.m. my brain tends to be fried, certainly today it is, it has been a good day but a long day.

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Replying to DJKL:
By Ruddles
18th May 2017 16:14

I'm struggling to find the letters t, a and x - in that order - anywhere in the question.

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Replying to Ruddles:
paddle steamer
By DJKL
18th May 2017 21:18

Not surprising as it is not in the question. Then again it is in the post by Democratus to which I was replying.

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Replying to DJKL:
By Democratus
19th May 2017 11:38

No idea now why I said tax, but there must be implications and as I said way outside my area.

Apologies for overcomplicating it. Mea culpa.

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Replying to DJKL:
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By Southwestbeancounter
18th May 2017 16:15

That was more along the lines of what I was thinking - the reverse of underpaying. I wondered if there were any issues with this where the shares have blatantly been sold at too high a price but maybe not.

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By rhino83
18th May 2017 16:22

What you haven't said is whether they intend to buy the shares from the son or for the company to issue new shares.

The company issuing new shares is the easy one, there will just be a large share premium account.

I agree with DJKL, there would be inheritance implications if they bought the shares off the son for this amount unless there is some underlying reason why the shares could be worth that much.

The purchase would be classed as a PET, but provided there are no other PET or CLT's in play then there is no issue there.

The only issue that may arise is that losses for CGT may be restricted. If there were to sell the shares at a loss or make a negligible value claim the loss would only be available to be used for gains arising from transactions with the same connected person.

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By Southwestbeancounter
18th May 2017 16:53

The company would issue new shares with a large share premium account like you say which I thought might look a bit odd hence my question in the first place.

Thanks for the info regarding the potential CGT losses being restricted.

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Replying to rhino83:
By Ruddles
18th May 2017 17:20

That's assuming that the future sale is in fact to a connected person.

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By rhino83
18th May 2017 16:25

Apparently the abbreviation for " Chargeable Lifetime Transfers" is an offensive word.

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Replying to rhino83:
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By Southwestbeancounter
18th May 2017 16:54

Ha ha! That's hilarious!! :-)

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By SteveHa
19th May 2017 08:45

I suppose it is if you get stung with the immediate IHT charge.

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