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Shareholder loan to Share Buy Back

Shareholder loan/advance to then a share buy back from the company

Currently dealing with a company with a year end of June 2018.

In the accounts for the year ended June 2018 the company has advanced one of the shareholders £200k.

This payment has been provided as more of an advance because they are going to sell a portion of the shares (10 shares at £1 par value) back to the company.

The company has in excess of £500k in retained earnings.

My understanding is that if this loan is not repaid within 9 months and a day from 30th June 2018, i.e by the end of March 2019 then there will be an advance corporation tax payment due of 32.5% of this balance, i.e £65k.

What the shareholders plan to do is get all the necessary paperwork together by the end of this month to approve the buy back of shares by the limited company.

My assumption is as long as that is done, then the £65k will not become payable, i.e the advance/loan will have been discharged.

I will in theory then be able to state in the balance sheet this loan/advance from the company to the director as an 'other debtor' in the accounts.

In the accounts for the year after that which run from 1st July 2018 - 30th June 2019 the double entry will simply be:

DR Share Capital £10

CR Capital Redemption Reserve £10

CR other debtors £200k

DR Retained Earnings £200k

Regarding other taxes, I need to make my client aware of the stamp duty of 0.5% on the disposal of shares payable by the limited company, so there is a liability of £1000 and also confirm exactly when this loan was taken out and check whether interest was charged on it. If no interest was charged then a BIK could be liable by the shareholder who would need to record this on his own personal tax return. There will obviously be a large capital gain payable as well for the shareholder based on the gain on disposal of his shares to the company.

Am I missing anything ?

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21st Mar 2019 21:25

Strictly, the loan needs to be cleared within 9 months, not 9 months and 1 day. It might sound pedantic but I’ve seen companies come unstuck because of the misunderstanding.

If you’re thinking that the seller will have a capital gain you’ll need to check the rules.

HMRC take the view that a buyback must be paid for in cash. There is not, as far as I know, any legislative authority to this but you need to be aware of HMRC’s approach. Having said that, HMRC are probably unlikely to care if the buyback is treated as a distribution chargeable to income tax.

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By Matrix
to Wilson Philips
21st Mar 2019 22:19

I think it is a requirement of the Companies Act and not HMRC that the shares are paid in cash. I thought this was to prevent a loan back if the company had insufficient reserves.

OP - other issues are HMRC clearance if you are going for capital treatment, depending if the conditions are met (5 yrs etc), P11D for the loan benefit. Resolutions, Companies House etc.

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to Matrix
21st Mar 2019 22:38

Section 691 of CA2006:

“Where a limited company purchases its own shares, the shares must be paid for on purchase.”

No mention of cash.

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By Matrix
to Wilson Philips
22nd Mar 2019 05:49

Yes that's what I was thinking of, where is the requirement to pay in cash for tax purposes?

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By Matrix
to Wilson Philips
22nd Mar 2019 13:03

Ok so I assume this is to avoid deferred consideration as with the CH section, neither of which are applicable.

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By Matrix
to Wilson Philips
22nd Mar 2019 13:05

Sorry did not finish, meant to say because the consideration was in advance.

Alan - haven’t they had 9 months to sort this all out? I don’t know if I would rush it all through in the next week, and obviously you wouldn’t get clearance yet.

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to Matrix
22nd Mar 2019 20:04

Possibly - but it still doesn’t explain why HMRC think that the payment needs to be in cash.

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