Can there be a progressive sale of shares?

Can there be a progressive sale of shares?

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Two brothers are 50:50 directors/shareholders in a company just into its 4th year of trading. By mutual agreement they have come to the parting of the ways. The departing shareholder wishes to receive £50k over two years, equivalent to £10k per share, which reflects massive practical and financial support given by him during the initial 24 months of trading to get the company self-sufficient. (No loan moneys are still owed to him). The remaining brother is happy with this. I believe that a sale of shares to the remaining sole shareholder would come under s1691 TCGA1992 qualifying for Entrepreneurs Relief. However I also understand that, under the Companies Act, 'the full price agreed has to be paid on completion', which the company could not afford. 

1) Can the disposal instead be broken into five separate, discrete stages, each its own sale of, say, one share every 4 or 5 months when the cash flow permits?

2) If the above is permissible, since the departing brother immediately becomes a minority shareholder after the first transaction, are there dangers that he needs legally protecting from, from the outset?

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By mn2taxhbj
20th Mar 2012 20:16

yes you can, but...

You need to clarify who the purchaser is going to be - you initially start by talking about a purchaser by the other shareholder, and then move on to areas more related to the company purchase of own shares legislation.

Company as purchaser

Yes you can have staged payments by the company as long as there is a single irrevocable contract at the outset which specifies dates, payments and number of shares on each date.  But there are a number of conditions to be met and you need to apply for clearance - Statement of Practice 2/82 gives you a template - otherwise the payments will be treated as income distributions.  The selling brother will not be a minority shareholder as he has irrevocably committed himself to the sale - (this is how you get around the continuing interest rules for a staged payment)  he would be owed the proceeds of sale by  the company and you would need legal protection.  However in your example the company purchase of own shares would not work because the shares need to have been held for five years (what was section 220 ICTA 1988), and may ahve problems continuing to eb connected to the company through the other brother - need to check the associates rules.

This is an area where you need to tread very carefully, try and find an experienced local solicitor to guide you round the rules and to draw up the relevant agreements.

 

Other brother as purchaser

Obviously this is much more straightforward, and as long as you can meet the relevant ER conditions for disposals then this should be much more easier to obtain capitla treatment.  The difficulty here is usually extracting the funds from the company to pay for the other brother's shares.

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Replying to mrme89:
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By accountsman
20th Mar 2012 21:27

Thanks, and sorry for confusion. My experience with small Companies has only ever been starting them, and then supporting their annual reporting and basic secretarial needs, never dealing with shareholder departures!

I wanted to concentrate on the route of brother B selling his shares to brother A because, as you say, the five year rule would apply to a 'company repurchase of own shares' and s1000 CTA2010 would apply making the proceeds effectively a dividend to B. Since he is a HR taxpayer we need a CGT exit if possible!

B is an officer of the company, he certainly holds a minimum of 5% of the voting rights (50% of course at the moment). From that I understand that s1691 TCGA confirms it is a disposal for Capital Gains purposes. What I really wanted to clarify is, can he sell his brother one share and take £10,000, then repeat the process 5 times during the two trading years as cash flow allows; then on his Tax Returns simply enter the total amounts received during that tax year, £20k or £30k whichever, with appropriate notes.

What was troubling me also was, is there any stage in the process where the remaining shareholder could say for example: 'I'm not playing this game anymore, you've only one share left, you have no rights, and I'm not going to purchase it for £10,000, it's £1000, take it or leave it!' I suppose that would be avoided by having the whole arrangement drawn up in writing, signed by both parties and witnessed preferable by a solicitor? Perhaps I'm being paranoid.

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By accountsman
21st Mar 2012 08:03

Derrrrr. Penny dropped in small hours. You said the difficulty is extracting funds from the Company to pay for the brothers shares. Of course. Dividends are no good because both have to receive them and brother suffers HR tax. DLA is fraught with complications. I suppose a personal loan route is the best option for A but relatively expensive. At least he can reward himself later as he pleases as the sole shareholder.

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By mn2taxhbj
21st Mar 2012 09:39

You say that they are into 4th year of trading - did the trade start immediately i.e. how close are you to the 5th anniversary of incorporation?  Would it be worth waiting, until after the shars have been held by the departing brother for five years and then getting a straightforward purchase of own shares?  You could pass at least part of the time doing the preparation, getting the clearance etc

 

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Replying to leshoward:
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By accountsman
30th Mar 2012 17:39

Sorry, only just picked up your comment. They're 15 months away to the 5th anniversary and absolutely resolute on parting now.

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By Roxanne Wralls
21st Mar 2012 10:57

Please can you just tell me...

.... where in the Companies Act it says, "the full price must be paid on completion"?

I agree that the best option would be to have a PoOS.

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Replying to Marion Hayes:
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By accountsman
30th Mar 2012 17:44

Sorry, only just seen your comment. I don't know, but two separate consultants have said it. It would be great if not true! The planning would be very easy. I should have asked for chapter and verse.

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