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Retirement planning for director of Ltd company

Retirement of limited company director and subsequent transfer of shares to existing shareholders

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I have a 3 person company (equal shareholder/directors, not related parties); 1 of the directors is considering retirement within the next 3-4 years.  Balance Sheet shows net assets of around £30k (predominantly cash at bank and trade debtors – very minimal fixed assets) and net profit for year averages around £90k. All directors receive salary and dividends on a monthly basis.

The company currently make pension contributions on behalf of all directors. The directors have suggested that the company make increased pension contributions into the pension fund of the retiring director over the next 3 years, of approx. £20k pa. In 3-4 years time she will retire and sell her shares to the existing shareholders for par value. All shareholders/directors are in agreement with this proposal.

Firstly, would this be an acceptable route to take? Secondly, is the process that simple (i.e. completion of stock transfer form and updating confirmation statement and PSC report at Companies House), or is this potentially something more involved. Seems straight forward enough, but if I am missing something here then would like to know in advance so I can look into outsourcing this one.

Many thanks in advance

Replies (5)

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Hallerud at Easter
18th Feb 2020 17:36

Notwithstanding the 25% tax free from pension scheme, director taking payout via pension will possibly be paying more tax on the sum involved than if they had sold shares and claimed ER bringing tax down to 10%. Are they happy with £60,000 re their shareholding possibly taxed at, in effect ,15%?

(Also might want to see what budget brings re pensions before signing on dotted line)

Thanks (1)
Replying to DJKL:
By Newmart
18th Feb 2020 18:19

Many thanks for your reply DJKL.

Yes, I have spoken to the director about future tax implications on pension and the alternative of selling shares and claiming ER relief - however, she is very keen to invest in pension scheme.

My query was more whether this was a viable route to take, whether this would be something which would be questioned by HMRC (in terms of selling shares at par value).

Wasn't sure if I was missing something in terms of the simplicity of the share transfer if this were the route they decided to go down? Also whether there was anything else I should be considering, as if this is something more involved and an area likely to be queried by HMRC I would much rather source some outside help sooner rather than later

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By WhichTyler
18th Feb 2020 19:47

As has been noted elsewhere today, a contract with deferred delivery is often risky (here it is if you pay me increased pension now, I'll sell you shares cheap in the future).

What happens if she dies before retiring but having received some (but not all) of the intended pension contributions. Or the business gets into difficulties? Or the other tow want to sell up to a fourth party? Will the shares be transferred in tranches as the pension payments are made? If so what happens to dividends?

The lawyer who draws up the agreement will ask all these questions and more...

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By Accountant A
18th Feb 2020 21:05

Presume if you "sell [] shares to the existing shareholders for par value"and they are actually worth more, you've got an issue, haven't you?

Are the increased contributions wholly and exclusively for the purpose of the company's trade? HMRC might not take issue as the numbers aren't huge but it is a consideration - especially when it's explicitly linked to an off market rate share disposal.

As DJ points out, it isn't clear any tax is avoided.

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By Tax Dragon
19th Feb 2020 06:57

Don't forget Pt7 ITEPA 2003.

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