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Overdrawn DLA and company purchase of own shares

Overdrawn DLA and company purchase of own shares

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We have a client that owns 51% of the share capital of a manufacturing business, his son has 49% , both A shares, the dad is nigh on 70 and wants to retire, he is £90k o/d in his DLA, could the dad sell his shares back to the company in exchange for clearing his DLA, capital treatment would be best as opposed to a distribution.

The company is long standing and profitable, over £90k a year before tax but after minimal salaries, so pretty much £100k a year before tax, Thanks

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By johngroganjga
16th Jun 2021 15:24

Yes the purchase price of the shares could be credited to the loan account.

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Replying to johngroganjga:
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By CW2012
16th Jun 2021 15:38

Thanks, not wanting to ask too much but do you think the HMRC would accept this as capital or would it be a distribution, to muddy the waters further the reserves of the company stand at £1,000, simply because the directors have stripped out the profits, is this a problem. Would there be an issue for the remaining shareholder as he has in effect gone from a 49% to a 100% shareholder, it feels like he has benefitted by a transaction with a related party, questions, always questions. Thanks

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Replying to CW2012:
By Duggimon
16th Jun 2021 15:44

Does it have any assets or anything else that would give rise to a valuation of £176,000 for the company?

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Replying to Duggimon:
Psycho
By Wilson Philips
16th Jun 2021 16:18

I know where you're comng from, but the value would probably have to be closer to £200k to support £90k for a 51% holding.

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Replying to Duggimon:
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By The Dullard
16th Jun 2021 16:45

Duggimon wrote:

Does it have any assets or anything else that would give rise to a valuation of £176,000 for the company?

Well, hopefully it's got a trade, if capital treatment is hoped for. Maybe there's some goodwill.

EDIT: I've re-read the OP, and based on the profitablity it might well be pushing it.

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Replying to CW2012:
Psycho
By Wilson Philips
16th Jun 2021 16:11

What is the share capital of the company? If that, too, is low than your client does indeed have a problem - in that a buyback would not be possible.

In any event, you are likely to run into problems with HMRC if you attempt to use the DLA instead of paying cash. Although, as I've repeatedly said, there appears to be no legislative authority HMRC take the view that an own purchase is valid only if payment is made, in full and in cash, at the time. They have 'confirmed' to me that offset of an overdrawn loan account is not 'payment in cash'. The solution is for the shareholder to find the funds to repay the loan and then the company to use the cash to buy back the shares. The end-result is of course exactly the same as John's suggestion, and I know how much he dislikes the idea of taking steps that have no practical effect, but if you want to have that argument with HMRC ...

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Replying to Wilson Philips:
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By Dib
16th Jun 2021 17:03

With only £1,000 of reserves it is going to have to have a very high share capital to get enough reserves to allow the share buy-back to happen!

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Replying to johngroganjga:
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By The Dullard
16th Jun 2021 16:29

It needs to be paid out in cash and put back in for HMRC to accept that there's been a valid purchase of own shares to which capital treatment could apply.

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Replying to The Dullard:
Psycho
By Wilson Philips
16th Jun 2021 16:40

It could be worse - it's not just about securing capital treatment. Again the subject of much debate over the years but HMRC's view is (or at least was last ime I looked) that an 'own purchase' not paid for in cash isn't an own purchase at all - with s455 consequences.

EDIT: I re-read your post and that may well be what you are alluding to.

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By CW2012
16th Jun 2021 17:16

Thanks for the replies, I was hoping to value the company using ongoing profitability, given that the directors draw £45k ish a year I thought two years income seemed ok as a valuation. The share capital is £100.00 no premium just issued price.

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Replying to CW2012:
Psycho
By Wilson Philips
16th Jun 2021 17:32

Your client is stuffed then. Possible solution? Father gifts shares to son (or sells to son for £12,300) with s165 election. Company, now under control of son, writes off the DLA.

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Replying to Wilson Philips:
Psycho
By Wilson Philips
16th Jun 2021 20:12

Although there is an obvious - so obvious that I missed it - problem with that approach.

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By Paul Crowley
16th Jun 2021 20:53

What is the goodwill worth if the entrepreneur works for free?
If the son has a £90K DLA then a different solution beckons.

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