Company share buyback and sale to new directors

Company share buyback and sale to new directors

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Company A’s shares are owned by Company B and Company A wants to buy back the shares at the investment value on Company B’s balance sheet. This is planned to be funded through a loan from Company B to A for the value it is buying its shares back for. Once company A owns its own shares again it will sell these shares to new directors. The new directors plan to pay a nominal sum of 40k for the shares.

Questions:

  1. What are the tax implications for the seller? Will this be under capital gains? The current owner has just concurrently purchased 66% of the company from other partners before selling 
  2. Will the loan between Company A and B need to have interest in to ensure its arms length and does not create tax implications?
  3. What would the tax considerations be for the new directors? Just stamp duty on price paid?
  4. Would the 40k paid be considered market value given the new entity has a loan for the amount to the old owner?

Replies (11)

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By Paul Crowley
20th May 2024 15:29

You really should pass this by an expert. Hope you were not part of the idea, or even thought it was a credible idea.
A company cannot be its own shareholder.

I would start with
Who is buying what from Whom?

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Replying to Paul Crowley:
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By Alexander Brown
20th May 2024 16:31

Thank you for replying Paul and agree on the expert given the complexity.

Company B was sole shareholder of Company A and one of the partners (3 previously) has just bought out all other partners of Company B and would like to pass the ownership of Company A to new directors. The new directors do not have the capital to buy at a market value so we are considering what structure could make this work and the associated tax implications.

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By JazzySasha
20th May 2024 15:30

Part 18 of CA2006 specifically deals with the acquisition by a limited company of its own shares. But not everyone has read the legislation.

My understanding is that a company buy-back of shares cannot "be funded through a loan"- CA2006 s691 (1) and (2) refer.

There are other ways to accomodate this. If this is your first time undertaking this sort of transaction and related tax planning you may wish to consider taking professional advice.

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By David Ex
20th May 2024 15:42

It really depresses me that people think it’s appropriate to come on the forum and bark a list of demands for valuable professional advice with even saying the word “please”.

Do they behave like that in person?

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Replying to David Ex:
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By Alexander Brown
20th May 2024 16:35

Apologies the post comes across like this, not my intention at all and appreciate reading it back it does!

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By paul.benny
20th May 2024 16:30

+1 to recommendations for proper advice. Bear in mind that the interests of the parties may not be aligned. And that saving tax now may store up larger liabilities for the future.

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By JD
20th May 2024 16:40

There is a reason these things are called ''Poos'' (purchase of own shares).

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paddle steamer
By DJKL
20th May 2024 16:47

Company B cannot just sell the company A shares direct to the individuals/new directors??

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Replying to DJKL:
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By Alexander Brown
20th May 2024 21:00

I think this is actually how it should be structured, the difficulty is coming from the existing director wanting to get some deferred consideration from the new directors he is selling to and needing some guaranteed income from Company A to repay previous directors of Company B. I think retaining an equity interest might also be better than what was initially suggested

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By Bobbo
20th May 2024 17:15

Alexander Brown wrote:

The new directors plan to pay a nominal sum of 40k for the shares.

Alexander Brown wrote:

Would the 40k paid be considered market value given the new entity has a loan for the amount to the old owner?

Given you yourself describe it as a "nominal sum", which generally means a token amount not being reflective of fair value, why would it be considered market value? (whether funded by a loan or not)

Why would Company B sell Company A for less than its market value?

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By Paul Crowley
20th May 2024 18:58

Buyers subscribe for shares in new company X
X uses that money to buy the business of company A from Company A

If X fails, subscribers can get income tax losses on the shares.

B lends money to X to complete the circle.

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