Shareholder resignation/buyout

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Scenario:

3 shareholder directors equally own shares in a small Private Limited company. Shareholder 1 and 2 want to stay in the business. Shareholder 3 wants out, and doesn't care for making a gain on the shares (i.e. they only want to recouperate the capital amount they put into the company).

A few questions:

- What would be the best way to structure this? i.e. Shareholder 1 and 2 purchasing the shares directly from Shareholder 3 using personal funds, or the company buying back the shares. Or any alternative option?

- What, if any, would the tax implications be on the company, if the company was buying back the shares?

- Would there be any tax implications be on Shareholder 1 and 2?

- What tax implications would Shareholder 3 face in the event they only recouperate the value of their capital, and no gain is made on the shares. e.g. if the shares are valued at £30k, but they only put in £15k and only want that £15k back without earning any gain on the shares.

Replies (10)

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paddle steamer
By DJKL
10th Apr 2024 10:40

Suspect this is one for a face to face meeting with an accountant to discuss real numbers re shares and get a feel for who A,B & C are vis a vis one another (how connected)

Buying shares from one another outwith company is certainly usually cheapest /simplest re fee costs /paperwork etc, likely a few share transfers and some stamp duty I expect, but of course perhaps if position is also being given up an employment agreement needs exercised- more complexity.

Then there is where is the cash, do individuals have any or is all in company?

Why these boards are not good re answers, all they can do is flag some of the questions that need asked.

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Replying to DJKL:
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By nuttyalmond98765
10th Apr 2024 11:22

Agreed that this would need a conversation with an accountant to discuss actual figures & circumstances, but any initial thoughts are appreciated.
The individuals have cash and the company also holds enough cash to buy back the shares.

Thanks for your response and for flagging questions to think about.

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By More unearned luck
10th Apr 2024 11:01

Directors can resign and shareholders can sell.

If the exiting shareholder deliberately sells at less than MV so that no gain is made then CGT will not be saved, as the law deems the sale to have been made at MV.

Clearly expert advice is needed.

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Replying to More unearned luck:
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By David Ex
10th Apr 2024 11:09

DJKL wrote:

Why these boards are not good re answers, all they can do is flag some of the questions that need asked.

More unearned luck wrote:

Clearly expert advice is needed.

The OP was working in tax for a top 4 last August so hopefully understands that ….

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Replying to David Ex:
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By paul.benny
10th Apr 2024 12:41

David Ex wrote:

OP - you mentioned 5 years' experience in tax. I know that this scenario may be somewhat different from typical Big4 clients, but I'm a little surprised that you can't make a reasonable go at answering this for yourself. If you managed the leap from the role you described in August, there's no shame in admitting something is beyond your experience and you need to seek external advice.

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Replying to paul.benny:
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By nuttyalmond98765
10th Apr 2024 13:15

Thanks for your response.

You’re right in saying that this scenario is very different to the ones I worked on in Big 4 - used to work on more complex/international tax matters so it’s a case of forgetting the basics of small private limited company matters which is why I came to this forum for assistance. No shame in asking at all.

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Replying to More unearned luck:
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By nuttyalmond98765
10th Apr 2024 11:25

Thank you for your response.

Agreed that expert advice is needed to discuss actual figures/circumstances. The exiting shareholder isn't aiming to avoid CGT on the gain but purely just wants out of the business so is happy to only take out their capital input, rather than the MV of their shares.

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Replying to nuttyalmond98765:
paddle steamer
By DJKL
10th Apr 2024 11:42

The other point is how you are valuing his shares, if say a 33% holding there likely needs to be a hefty discount to get to an MV irrespective of valuation approach.

What basis are you using, EPS,DPS, NAV, are you adjusting profits if say directors not paid market rate salaries. What percentage of company held, are all shares equal in value/voting, all the factors that impact MV will need considered?

Until MV correctly estimated/justified/supported you really do not have a problem to address.

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Replying to nuttyalmond98765:
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By AndyC555
10th Apr 2024 11:51

HMRC internal manual - CG14542

"A transaction is ‘otherwise than by way of a bargain made at arm’s length’ when one of the persons involved in the transaction does not intend to get the best deal for themselves from that particular transaction. That person enters into the transaction with the subjective intention of giving some gratuitous benefit to the other person."

Specific circumstances are important but you can see how HMRC might conclude that the proposed vendor is giving gratuitous benefit.

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By Taxguy96
10th Apr 2024 11:51

Questions answered

1) Depends on various factors
2) Stamp Duty would be payable by the company
3) Depends again - if transaction not done at MV and they are ERS then potential income tax charges for value gained.
4)Depends on value/transaction structure

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