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Limited company share value after loan

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Suppose a limited company with 10 shares has total net assets of £50000, giving it a share value of £5000 per share.

 

It now takes a loan of £75000, and subsequent to this one of the shareholder wish to transfer his share to another share holder.

 

Some guidance on the share value after taking of the loan would be appreciated.

 

Thank you.

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By Tax Dragon
19th Jan 2021 06:13

Why would a loan (ceterIs parabus) affect the value? Company's got extra money in the bank account but owes that money to A.N.Other. Balances out. Doesn't change net assets.

Btw1, a company with £50,000 net assets and 10 shares is highly unlikely to have a share value of £5,000 per share.

Btw2, not every share will be worth the same.

Btw3, when it comes to the tax, there may be different values on the same shares depending on context. A basic example is given by the IHT v CGT treatments. Could be different again (depending on context again) for income tax.

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By Ashaque
19th Jan 2021 07:48

............owes that money to A.N.Other. Balances out. Doesn't change net assets.

Thank you Tax dragon. If it balances out doesn’t it at that point reduce the net assets as the company now has taken on an extra liability.....sorry but could you elaborate so I am clear in my mind!

........... highly unlikely to have a share value of £5,000 per share.

Even if the only asset is cash and nothing else or did you mean £4999 for a nominal value of £1?

It is to calculate the stamp duty payable if any.

Much appreciated.

BW
ASH

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Replying to Ashaque:
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By Tax Dragon
19th Jan 2021 08:04

Balances out... 50 = 50 +75-75 = 50.

Even if... I wouldn't pay you £50,000 for a company that had £50,000 cash and nothing else. I could only ever lose, and never win, from such a transaction.

Stamp duty... is unlikely to be the only tax in play.

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Replying to Tax Dragon:
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By Tax Dragon
19th Jan 2021 08:19

Even if....

And, more to the point, suppose I'd pay you £45,000 for the whole company, I still wouldn't pay you £4,500 for one share.

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By Ashaque
19th Jan 2021 08:19

Thank you again Tax dragon.

In your explanation the -75 is still outstanding and needs to be paid back eventually from the company’s profit going forward. Does that change the equation?

Call me dumb but still confused!

BW
ASH

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Replying to Ashaque:
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By Tax Dragon
19th Jan 2021 08:23

Then it's future profits changing net assets. Today, future profits don't exist. Today, net assets are the 50k cash you started with, the 75k you've borrowed, less the 75k liability to repay that borrowing equals 50k. Isn't it?

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Replying to Tax Dragon:
Psycho
By Wilson Philips
19th Jan 2021 08:28

And of course if the company is generating profits that is one more reason to think that the company is not worth £50k.

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Replying to Wilson Philips:
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By Tax Dragon
19th Jan 2021 08:54

Indeed. Net asset valuation may be appropriate where there's cash and nothing else, less so the more other stuff that gets added to the mix.

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Replying to Ashaque:
Psycho
By Wilson Philips
19th Jan 2021 08:27

Or ... the £75k could be paid back out of the £75k extra cash that the company now has.

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By Ashaque
19th Jan 2021 08:54

Thank you TD and WP.

Maybe I haven’t explained myself fully.

Let me elaborate ....the company has 50k in cash currently. It will take a loan of 75k to buy an asset worth 125k. Once this process is complete what would you value its 10 shares to calculate any stamp duty on transfer of shares?

WP the company has been inactive with no profits for 2-3 years and is changing its business all together.

Thank you for your patience!

BW
ASH

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Replying to Ashaque:
Psycho
By Wilson Philips
19th Jan 2021 09:17

I'm not going to offer an opinion on the value of the shares, because I've left my piece of string at home. But you are overlooking the fundamental aspect of a balance sheet - it balances.

Before the loan, the company has net assets of £50k (Cash £50k) (and therefore presumably profits of £50k or so from the previous trading period). After the loan and the purchase of the asset, the company has net assets of £50k (Asset £125k less loan £75k). The net position is exactly as it was before, so in theory nothing has changed in respect of the company's value.

In reality, and depending for example on the nature of the asset, the company may now be worth slightly less since presumably the asset will immediately start to depreciate in value. However, that has nothing to do with the presence of the loan. Instead, imagine the company already had free cash of £125k (and nothing else) which cash it used to buy an asset for £125k. Is the company worth the same? At that very precise moment, perhaps yes, but if nothing else happens and the asset falls in value over time, then so does the value of the shares - but that's a function of the nature of the assets held by the company.

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By Matrix
19th Jan 2021 09:02

Stamp duty would be payable on the consideration which may or may not be the same as the market value.

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By tom123
19th Jan 2021 09:04

How do you get to buy an asset 'worth' £125k with £75k loan - are you also spending all of the cash in the bank?

What is the asset, what will it do?

Will you not require cash to operate the asset to generate the income.

Of course this is an exam question, but, even so, facts are too thin to give any particular answer.

One person's asset is in fact often someone else's problem to maintain and get rid of.

How much, really, are all the 747s worth parked up right now?

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By Paul Crowley
19th Jan 2021 09:19

Second question on same theme
On last you were asked what asset?

Is there a real point to the questions?

If anyone wanted the £125 thing they would rather buy a £125 thing than buy your old company with its history
The company reduces the value of the thing.

The company may have value, but I would not take the 1 share at 10% even if it was free. I do not know what the history of the company is

Talking in per share prices on a close company makes no sense
There is no market

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By Ashaque
19th Jan 2021 09:18

Thank you Matrix.

So in summary, how do you value a limited company share with outstanding debt for transfer purposes and calculate CHT +/- stamp duty?

BW
ASH

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Replying to Ashaque:
Psycho
By Wilson Philips
19th Jan 2021 09:58

Matrix already told you - Stamp Duty is payable based on the consideration actually paid. The value is irrelevant.

And for the last time, the outstanding debt is itself irrelevant for valuation purposes. If the company is being valued on an assets basis (which may or may not be appropriate) the debt is simply part of those net assets. For the last, last time if the company borrows £x and uses that £x to buy an asset the net asset position is unchanged. And so, therefore, is the value.

One final example that might clarify things for you - assuming an asset based valuation and assuming no adjustments for liquidity etc:

Company 1 has cash of £100k and share capital of £100k. I think you would argue that the company is worth £100k or thereabouts.

Company 2 has cash of £150k and an overdraft of £50k, and share capital of £100k. How much would you say Company 2 is worth?

Company 3 has an asset valued at £100k and share capital of £100k. How much is this company worth?

Company 4 has an asset valued at £225k and a loan of £125k and share capital of £100k. How much is this company worth?

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By bernard michael
19th Jan 2021 09:26

Before the OP moved the goalposts by providing additional information the situation had not changed from the initial valuation of £5000. As there is probably going to be more squeezed from him/her I'm not going to bother anymore

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Replying to bernard michael:
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By Tax Dragon
19th Jan 2021 09:51

I think there's some old cod lying about. Such can have an impact - on both tax (nature of relationships, nature of transactions) and values.

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By graemeban123
19th Jan 2021 10:12

The only way to make sure you value the Company and more importantly the % of the shares that you wish to be transferred is to complete a Form CG34 and submit the full information and calculations on how you have valued these shares to HMRC for their agreement. If you don't your actions could come back and cost you for not getting it correct and agreed at a later date. If the Company suddenly takes off over the coming years HMRC could argue the values used now if not agreed where undervalued and various tax adjustments.

You do not know how to value the Company, as you yourself have highlighted.

As others have highlighted it is not as straight forward as just valuing the Company.

Where would you start valuing the full Company? There are various ways and normally a combination of a few is the best, but you will need to justify why you have used the basis you have.

Once you have a value for the whole Company you need to look at the % of the shares that are to be transferred/sold. It is not just taking the value of that % of the overall Company. It will need to be adjusted for various factors. How small the % being sold is, who the individual who is going to end up with the shares is and what does it do to there overall shareholding - does it now make them the majority shareholder? You will then have to justify with evidence how you have come to make these adjustments.

Various other points but these are just to give you the idea it is not as straight forward as you appear to think it is. You should seek professional advice and let them do the calculation and get the agreement with HMRC for you. The figures involved are not high so it should be straight forward for them to do and shouldn't cost you too much, that is unless there is a lot of relevant information you haven't posted on here.

This is not my advice on what to do but you could also just pick a figure out the air and go with that and hope for the best.

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Replying to graemeban123:
Psycho
By Wilson Philips
19th Jan 2021 10:26

graemeban123 wrote:
The only way to make sure you value the Company and more importantly the % of the shares that you wish to be transferred is to complete a Form CG34

A couple of points:

CG34 is only appropriate once the transfer has taken place.

Appropriateness of CG34 will depend on the reason for the valuation, in particular the relationship between transferor and transferee.

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By Tax Dragon
19th Jan 2021 10:23

And my final word: reporting re stamp duty is not the only disclosure to make to HMRC.

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By Matrix
19th Jan 2021 12:22

In my view a share in a private company is worth what an arm’s length buyer is prepared to pay and a seller is willing to accept.

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Replying to Matrix:
Hallerud at Easter
By DJKL
19th Jan 2021 12:18

And there are myriad ways of calculating what that might be if not arms length or for other reasons, if there were not there would not be various books (usually expensive) on the subject and accountants would not earn that much advising re same.

Here is one, I do not own it so cannot comment on how useful, but do have Livens, Gurney and Hamilton Baynes.

https://www.amazon.co.uk/Practical-Share-Valuation-Nigel-Eastaway/dp/152...

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