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Succession shares

Best way to transfer company to employee

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Good morning

 

I would value your comments. In the fullness of time I will wish to lessen my work burden and gradually withdraw from my limited company business- my wife and I are the shareholders. My employee has been with me for 20 years and it is hoped and planned that he will take over the company. 

How best to achieve this? Am I right that a simple transfer of some of my shares over the course of a few years, as a gift, will trigger an income tax charge for my employee?

Would a share scheme achieve the result of my employee ultimately gaining control of the company? I wondered about a SIP?

 

Thanks for taking time to look at this

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By Marion Hayes
18th Jun 2018 10:00

Securing the future of both your business and the employee in your retirement is an exceptionally important/emotive issue and should not be based upon a forum like this. You are right that, in some circumstances there would be an income tax charge, others would have differing outcomes for both you and your employee.
You need to take specialist advice on how to withdraw whilst securing your finances. Please spend some money and talk to a specialist as soon as possible - you never know what is round the corner

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By gbuckell
18th Jun 2018 10:26

I endorse Marion's comments. There are many variables in this including the current value of the company, what you wish to receive, the future prospects of the company, the nature of the business an whether the employee will be required to invest cash. Proper advice is essential.

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By philrob
18th Jun 2018 11:07

From your brief description, this is a VIMBO (Vendor Initiated Management Buy Out) - you will be initiating the transaction.

You don't mention timescale.

There are loads of ways of achieving a transfer and extracting money but it is a specialist area and you will need specialist advice (or it WILL bite you on the [***]!)

You might use a combination of options, some so the employee has shares soon, others so you get cash out eventually.

Options to consider (when you speak to your specialist advisor) include:
- Setting up an approved share option scheme for your employee - will need a current valuation of the business as the starting point, employee can buy in at current value at some point in the future, cash for the new shares issued goes to the company not you.
- Company buy back of your shares- if the company has enough cash (or can raise it) and adequate reserves, it can buy back your shares (and cancel them) leaving the employee with control. Lots of tax things to consider.
- Straight purchase of your shares by the employee (employee finds the cash (from their pension???), perhaps as a loan/IOU from you) and buys the shares from you. Again, tax (and when it has to be paid) would be a factor here.

BIG WARNING - if you enable your employee to have shares make sure that there is a shareholder agreement in place (think of it as insurance/pre-nup - hopefully never needed) and that that agreement has good leaver/bad leaver clauses in it.

In general you can get rid of a spouse far more quickly, predictably (and cheaply) than you can a minority shareholder.

Good luck.

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