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Director retiring

Director retiring

A company has 2 directors.  One is working in the company the other is retired and has not worked for the company for several years.  The retired director wants to sell his shares either to the other director or back to the company.  Net value of company is 70k mostly cash/debtors and no dividends have been paid for the last few years so it is almost all distributable profits.  What is the best way of paying off the director? I am thinking that paying half of the value out as dividends would give the first director funds to buy back the shares at reduced value othewise he would have to find 35k and the cash is available in the company.  Would this then split the amount received by the exiting director into dividend income and then capital gain.  Any tips would be appeciated.  Also I know goodwill is very subjective but would anybody recommend that an allowance be added considering the exiting director has not been involved in the running of the company for the last few years?


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18th May 2012 16:37


Are you sure the value of the business is actually £70k, as you refer to the value being cash/debtors? You might want to value the actual business in comparison to the value of it's assets, as the trading activity must have some value.

Even though the retiring director isn't involved in the company it doesn't remove the fact that his shares are worth the same amount per share as the director who is still running the business. 

The matter of cash extraction would be up to the board, as they'd have to decide on whether they want to take the cash out of the company. I'd imagine the retiring director would want to remove the cash, for obvious reasons, but the continuing director might want to leave it in for working capital.

Also, it's likely that you'll need to submit a CG34 to HMRC disclosing the valuation used when selling the shares, just to make sure the revenue are happy it's done at market value. In which case you'll need a formal business valuation to accompany the form. 

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21st May 2012 14:09

Thanks for that.  There are

Thanks for that.  There are very few fixed assets and the company is mainly involved in servicing heating systems. The reason I say that the 70k is the value of the business is that I believe the retiring director just wants his money out and the remaining director wants to buy him out.  If the agreement between them is that there is little or no goodwill involved, would the revenue still need to be consulted (incurring the cost of an independant valuer)?  If half of the value were to be declared as dividends (as this is retained profit) this would give the remaining the director the cash to buy out the retiring director, leaving enough cash in the company.  Alternatively, could the company buy back the shares and what implications does that have? 

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21st May 2012 14:23


I would be highly surprised if the revenue would agree a valuation based on assets only, when the company has trading activity and revenue streams (and assumed profitability?). I personally would value the business myself and then send it away to HMRC to confirm the valuation, but you might want to seek an independent valuation. 

If the company were to buy back the shares itself consider stamp duty (possibly due twice, once when the company buys the shares and once when the other director buys them from the company). Possible chargeable gain when selling the shares on etc. Restriction on future dividends. I personally wouldn't go down this route, but some others might due to the availability of cash within the company. 

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21st May 2012 16:18

What about using the Capital Reduction procedure (solvancy statement etc)?

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By Hansa
21st May 2012 16:40

Maybe I'm missing the point ...

AndrewSullivan says: "I would be highly surprised if the revenue would agree a valuation based on assets only,"

If, as the OP suggests,

1. Each shareholder takes out £35k (before personal taxes) as dividends. (assuming of course the company is still solvent having done so).

2. The retiring director does just that, retires and resigns as director.

3. The retiring shareholder decides to sell his shareholding to the remaining shareholder for a nominal £1 (or if more than 1 share issued, at par for his whole shareholding).

What is there for the Revenue not to like?  It would be a matter of fact that the shares had been sold at the price "paid" and as a private company with pre-emption rights. who other than the "other" shareholder could he practically "sell" to? 

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22nd May 2012 14:28

The point I was trying to make is that the revenue might not agree to the valuation provided, which could alter the amount of CGT they receive etc.

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By Hansa
22nd May 2012 15:31

but if he sells his shares at par ....

Maybe I've been too long away from UK tax, but if the OP's client sells at par (ie the amount at which he originally bought the shares) where does CGT come into it?

Lets make a simple example B/S

FA:  Neg

CA: Cash at Bank 71k

       Trade debtors 5k

CL   Trade creditors (5k)

S/H funds 71k

Once the £70k dividend has been paid, this is the B/S


FA:  Neg

CA: Cash at Bank 1k

       Trade debtors 5k

CL   Trade creditors (5k)

S/H funds 1k (let us say 1,000 x £1 shares issued)

No goodwill, shares sold at par (say £500 in my simplified example) 

Remaining shareholder buys those shares for £500 from the outgoing S/H.  

End of story.  ... No gain, no loss and no need to involve the Revenue as far as I can see. 

Or have I missed something?


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22nd May 2012 16:35

Bargain not at arm's length

The point I believe Andrew is making is that the share disposal must be treated as made at market value which may or may not be nominal in the example.

The other possible issue is that of employment related securities. Is the other director getting a benefit if the shares are worth more than price paid?

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By Hansa
22nd May 2012 19:38


I accept the points of both AndrewSullivan & gbuckell  insofar this may be the correct "by the book" way to look at matters and I am NOT arguing with their technical knowledge.  However, as The OP has told, us the business

1. Is a heating system servicing/repair business (goodwill worth hardly more than the cost of the next yellow pages ad).

2. The joint owners both believe there is no goodwill value

3. The cash reserve seems to be the only substantial asset

The above 3 points indicate a dying business (no FA, no goodwill, just about ticking along and probably only providing a "living" for the remaining director).  

One question needs to be asked ... Could a 50% share be sold to anyone else? and, if so  at what price?   If the answer is No (or if yes & negligible), then I think on a practical level I am 'correct' and any other route will just incur needless costs for the OP's clients.


One after thought... Pay the dividend, let the retiring director resign, and dilute his holding to practically nothing by issuing further shares to the remaining director (mini-rights issue).  This would leave Mr Retiree with a single share against (say) 999 for the other shareholder.   Problem solved.



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24th May 2012 13:18

The comments above have made it far too complicated...

... and are seeing problems where there aren't any.

Assuming the two shareholders aren't otherwise connected there can be no issue with the HMRC as to whatever price they agree between themselves.

Once the price is agreed the way to deal with paying it is via a purchase of own shares. You will need to get HMRC clearance for CGT treatment for the vendor so he pays CGT at 10% only - but that shouldn't be too difficult.

Er - - - that's it. Job done.

PS: PM me if you want some template docs for a purchase of own shares. Solicitors will charge a fortune for what is actually a very simple process.

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24th May 2012 15:17

Way forward

Whilst I accept that the shares may not be worth more than net asset value, it is not 100% clear that this is the case. It depends on knowing more details about the business. The company may have on going contracts to service the heating systems of corporate clients. £70k is quite a lot of assets for a company with no goodwill. The retiring director may be happy to be bought out for a price that does not recognise goodwill. Given he has not worked in recent years, this seems reasonable. That does not mean that goodwill is valueless.

However, I agree that a purchase of own shares is the best way forward. That way the remaining shareholder does not acquire anything directly. This does not completely remove the employment related securities issue but does push it in the background. There will only be one lot of stamp duty and 1/2% on £35k is not a lot!.

If the retiring shareholder's income is low enough, dividend treatment might be better than capital.


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