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Checking my thinking

Shareholder exit agreed for nil consideration

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Client is a micro entity with 2 directors who each own 50% of the issued  share capital.  The relationship between the directors is brother-in-law. 
Company was set up 5 years ago (was previously a small partnership).  This was initially a part time / weekend business, with both directors working full time in other jobs. Shortly after incorporating 5 years ago, director 1 was made redundant and decided to go run the business full time, with the intention of building it up. From that point onwards, director 2 took a back seat and has not had any real involvement since. 

5 years on, the business is sustaining director 1 who takes a salary. The company makes modest profits and doesnt pay dividends. 

Director 1 has had a discussion with director 2 and they have agreed that director 2 shall leave the company, ie, he will resign as director and 'give up his shares' for no financial consideration. 

I have been considering the options. Transfer of shares from director 2 to director 1 would not be advisable, as this would fall within the ERS regs with director 1 obtaining shares. Yes, the reason could be friendship, but I suspect it is in reality it is a reward for input and is taxable at MV. 

Also, Brother-in-laws are related parties for CGT purposes so market value would apply.

I was thinking that the simplest way would be a company purchase of own shares, for £1. The shares could then be cancelled and director 1 becomes the sole owner by default.  I am now thinking that, although the connected parties rules don't apply to POOS transactions,  TCGA 1992, s17, could apply but am not sure.  If so, then director 2 will have a market value disposal for CGT purposes. 

Questions are a) opinions on whether s17 would apply and

b) am I missing anything?

It is a very long time since I've dealt with PooS transactions but it seems to be the simplest way of achieving the objective, ie, director 2 wants out and doesn't want any payment for his shares. 

Thanks in advance

Replies (9)

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By Paul Crowley
29th Aug 2021 18:08

The missing data is the value of company.
Director one could have a dividend to make less value, with a waiver on shareholder 2
Could do that several times
And The market value of non marketable shares is quite low, given that to date no dividends have been declared
I personally would not give tuppence for those shares

Thanks (1)
By Manchester_man
29th Aug 2021 18:19

I agree. The company is worth no more than 15k and probably closer to 10k. Not sure whether this would need to be agreed with SVD.

I think CPooS is the answer as it avoids the potential ERS tax charge.

Thanks (0)
By Winnie Wiggleroom
30th Aug 2021 08:54
Thanks (1)
By Duggimon
30th Aug 2021 09:23

I too would be looking at poos.

Thanks (1)
Replying to Duggimon:
By wingman22
30th Aug 2021 09:50

Possibly comment of the year. Got to love an acronym.

Thanks (4)
By Manchester_man
30th Aug 2021 15:30

Thanks for the confirmation. I am now concerned about the ERS legislation. Shareholder 1 will not receive any new shares, but I don't think new shares have to be received for the ERS legislation to come into play. Director 1 will receive a post-transaction uplift in value, so I'm now trawling guidance to see whether this is indeed a concern.

I've now found out that they are not brother-in-laws, as there is no marriage, so I don't believe they are related parties for CGT purposes.

The plan is to do a PooS at nominal value i.e. £1.

Am I over thinking this? I just don't want to fall foul of any rules. I hope that the transaction is safe from ERS taxes, but I can't see how it can be, because of the transfer of value.

P.s. I have realised that the client isn't actually married so the parties are not brother-in-laws (not that this is relevant to ERS)

Thanks (0)
By SteveHa
31st Aug 2021 12:30

If the market value of the shares based on company value is only up to £15K, and if the director has no other gains in the year, I wouldn't worry about. Even MV is only £7.5K and well within the AE.

Thanks (0)
By Tax Dragon
01st Sep 2021 07:51

I agree ERS, not CGT, is your issue on the facts given, with the proposal suggested.

What are the tax/other consequences/issues that would/could arise from winding up this company and D1 striding* out afresh with his/her own?

*Edited. I originally said "striking". Which still sounds correct to me. Is this down to regional differences?

Thanks (1)
Replying to Tax Dragon:
By Hugo Fair
01st Sep 2021 11:49

Your *point ...
They're both idioms but not as far as I'm aware with regional bias or distinction.
Striking out is what you probably meant ... being indicative of (new) independence;
whereas striding out (whilst similar) has more to do with the vigour/determination of the person.

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