Share this content

Does this approach to company purchase work

Client wishes to but another business, by purchasing 100% of shares partly using cash in new busines

Didn't find your answer?

Client company is looking to purchase another business and is looking to purchase all shares in business, price is £500k which is to be paid as follows:

£200k paid direct from client company, and £300k paid following purchase (effectively same or next day) using £300k in cash in purchased company, which would vote dividend to client company once it takes over. Both are UK companies and as far as I can see at present would be eligible for exemption on dividend from subsidary (this will obviously be confirmed).

Does this work without triggering any tax liability for my client company?

As an additional question I would assume that if the purchase of shares was split between client company and individual (50/50) this would cause issues with the use of the cash in the purchased company as individual would be taxed on their share of the dividend?

Many thanks for any thoughts.

Replies (25)

Please login or register to join the discussion.

avatar
By paul.benny
24th Aug 2021 13:09

Why not just pay £300k and have existing owner extract their £200k cash before completion?

Thanks (0)
Replying to paul.benny:
avatar
By Wycher
24th Aug 2021 13:17

I guess it would hinge on if the seller can claim business asset disposal relief on the £300 cash drawn down, prior to sale, as well as the £200k for the shares. If done the way proposed then should have no issues claiming relief on whole £500k.

Thanks (1)
avatar
By David Ex
24th Aug 2021 13:14

Wycher wrote:

£200k paid direct from client company, and £300k paid following purchase (effectively same or next day) using £300k in cash in purchased company

So the client pays £200k and gets £300k back the next day? Reading this on my phone but what am I missing??

Thanks (1)
Replying to David Ex:
By Duggimon
24th Aug 2021 13:18

No, they agree to pay £500K for a company worth £500K, which is £200K for the business plus £300K in the bank. They buy the company with £200K cash then hand over the £300K that's in the bank after taking it from the purchased company as a dividend.

Thanks (1)
Replying to Duggimon:
avatar
By David Ex
24th Aug 2021 13:21

Duggimon wrote:

No, they agree to pay £500K for a company worth £500K, which is £200K for the business plus £300K in the bank. They buy the company with £200K cash then hand over the £300K that's in the bank after taking it from the purchased company as a dividend.

Face palm!

Thanks (0)
Replying to David Ex:
avatar
By Wycher
24th Aug 2021 13:18

Apologies total purchase price paid will be £500k, sorry if didn't make that clear.

Thanks (0)
avatar
By Paul Crowley
24th Aug 2021 14:03

This sounds like the director pays nothing but gets half of the shares of a company worth £500K (at time of purchase)
The client company pays £500K but gives away half that value in shares to the director

Have I understood correctly?
Only £200K paid on account

Then bought company pays a dividend to shareholders of £300K
£150K to parent and £150K to director's Loan account

Then client company pays the balance

Result
Director has not paid for shares, been given them for free. Is this a separate transaction?
Has a taxable dividend that he lends to company?

Thanks (1)
Replying to Paul Crowley:
avatar
By Wycher
24th Aug 2021 14:52

Hi Paul,

I assume you are referring to the last part of the question i.e. purchased 50/50 by company and individual. In this scenario the individual would put in £100k and the company the other £100k for 50% of the shares, the balance then being paid via the cash in the business, but of course that cash would come out as a dividend and £150k would be taxed on the individual as far as I can see.

Thanks (0)
Replying to Wycher:
paddle steamer
By DJKL
24th Aug 2021 16:15

So the individual would need to use other private funds to pay his/her later tax bill post receiving the £150k dividend.

Thanks (1)
avatar
By The Dullard
24th Aug 2021 14:08

Yes. This is fairly standard and legitimate.

The OP is correct that having a non-corporate co-purchaser has adverse implications for the co-purchaser. Without understanding why that might be contemplated, I can't add any more than that.

Thanks (1)
Replying to The Dullard:
avatar
By Wycher
24th Aug 2021 14:55

Thanks for the reply, the alternative option was because the individual who is a shareholder (small) in the client company would like a bigger share of the new business so was proposing to put in £100k from their own pocket.

Your response confirms my thoughts that it has an adverse impact on the tax position for him.

Thanks (0)
avatar
By paul.benny
24th Aug 2021 14:56

Aside from tax effects, the buyer needs to have the asset value of the target company nailed down. The most common way is to agree a balance sheet at a prior date - say 30 June here and to adjust the purchase price for the movement in net assets.

If you don't do that, seller could extract the cash (or just spend it) leaving buyer contractually obliged to pay the full price and not get what they were expecting.

There may be other ways of structuring the transaction - buyer acquires assets and undertaking and leaving seller to settle the liabilities. The benefit (for buyer) is that hidden and/or unknown liabilities remain with the seller - including corporation tax. On the seller side, they can plan their payout of the proceeds, potentially over a number of years.

The structure of a transaction can be tax optimised for buyer or seller, but rarely both. And that's part of the price negotiation.

Thanks (1)
By Duggimon
24th Aug 2021 15:52

The position where your client, whether it be just the Ltd co or the Ltd co and individual, pays £500K for a company worth £200K and £300K in cash, is the worst possible position for them.

Cash in a company is not worth as much as cash not in a company. The £300K cash is worth in the region of £200K to the seller as that's what they're left with if they take it out today, but your client is proposing giving them the full £300K for it.

Thanks (1)
Replying to Duggimon:
paddle steamer
By DJKL
24th Aug 2021 16:18

That may of course have been considered arriving at the £500k price.

Personally I am not keen on share purchases and inheriting the target's back history and prefer asset purchases, warranties and diligence are all well and good but......

Thanks (1)
Replying to Duggimon:
avatar
By Wycher
24th Aug 2021 16:20

Hi, Don't disagree with that but in this proposed example they have effectively discounted the cash on the £200k, i.e. realistic valuation of the business would be circa £300k based on profitability, it just happens to have retain a lot of cash for some reason, they are looking to pay £200k of their own money and would expect to see payback at current levels within 3 years, which seems to me to be a good investment.

Thanks (0)
Replying to Wycher:
By Duggimon
25th Aug 2021 09:21

It would be a good idea to find out why they retain a lot of cash, because if it's required for their business then buying it and immediately getting rid of £300K might be unwise.

Thanks (0)
Psycho
By Wilson Philips
24th Aug 2021 16:20

A word of warning - because I have seen someone bitten by this. Make sure that the dividend is not declared until the new owner is registered as such in the target company records (and preferably not until the STF has been stamped).

Thanks (1)
Replying to Wilson Philips:
avatar
By Justin Bryant
24th Aug 2021 17:50

That potential problem is easily solved with a nominee deed and PoA signed by the vendor pending new member registrations.

Thanks (0)
Replying to Justin Bryant:
Psycho
By Wilson Philips
24th Aug 2021 19:28

No sh*t

Thanks (0)
avatar
By Montrose
24th Aug 2021 16:52

Forming a new holdco as purchaser allows the cash in target company to be paid free of tax as a dividend to its holding company.
Shareholding in holdco can be whatever suits you.
Vendors will need clearance from HMRC first to avoid dividend being attributable to them regardless of structure used.

Thanks (1)
Replying to Montrose:
avatar
By Wycher
24th Aug 2021 17:05

Hi Montrose,

Obviously vendor's position is for them to confirm but presumably if dividend is not paid until shareholding has been transferred to new company then no requirement to get vendor to agree in advance with HMRC as given current response times unlikely to hear back this year even if they requested now?

Thanks (0)
Replying to Wycher:
avatar
By Montrose
24th Aug 2021 19:11

ICTA 1988 s707 requires HMRC to say yea or nay within 30 days !

Thanks (0)
Replying to Montrose:
Psycho
By Wilson Philips
24th Aug 2021 19:52

ICTA 1988 s707 became obsolete more than 30 days ago.

Thanks (0)
Replying to Montrose:
avatar
By The Dullard
24th Aug 2021 21:23

Utter b011ox!

Fuch this [***] layout of posts. I was replying to the bu115h1t post about the vendor needing HMRC clearance. Referring to ancient legislation means that the fundamental change of ownership has been completely missed.

Thanks (0)
avatar
By Richard Grant
25th Aug 2021 08:36

Unless you are rolling in money I would suggest you would be heading for massive cashflow problems.

Thanks (0)
Share this content