We have a client which has 2 directors (equal shareholding) and director A (DA) wants to buy director B (DB) out. The consideration will be a phased payment, but the leaving director is to resign and divest the shares immediately.
As far as I can see, there are 2 options.
1. DA buys the shares – his base cost will obviously increase, but the consideration will effectively be paid from the company (he doesn't have the funds personally), going against his loan account. He will have to declare dividends to clear the loan, giving him a huge personal tax bill.
2. The shares are cancelled – I think it passes all of the tests for capital treatment, as I believe you can get round the payment issue by DB loaning the balance to the company. However, it would fail on the 30% rule (think this is debt:share capital rather than debt:reserves). Therefore, it would be a revenue distribution in the hands of DB, and presumably all at once rather than when the actual payments are made. So in this case, DB would have the huge personal tax bill.
So unless the company lends the money to pay DB in full, then one of the directors will end up with a big personal tax bill.
Have I got this right?