succession planning company share purchase€¦ · estate/vendor . avoiding being taxed as a...

COMPANY SHARE PURCHASE SUCCESSION PLANNING

2

TODAY’S WEBINAR HOUSEKEEPING

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TODAY’S WEBINAR

Here’s what we’ll cover:

• The advantages and disadvantages of a company share purchase

• The tax implications including capital gains tax

• How a company share purchase compares with own life plans written in trust

• How to use cash flow modelling software to help sell business protection

THE LEARNING OBJECTIVES

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COMPANY SHARE PURCHASE WHAT WE’RE GOING TO TALK ABOUT

• The basic process

• Taxation of the premiums and benefits

• Taxation treatment on the estate

• CGT treatment of survivors

• Companies Act requirements and treatment of policy proceeds

• Summary – pros and cons.

5

COMPANY SHARE PURCHASE CUSTOM CONTROLS

Company insures person

Benefits paid to Company

Benefits paid to company

Company insures person

In the event of death or

critical illness

Benefits paid to company

Company buys back

shares

Shares

Shares cancelled

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COMPANY SHARE PURCHASE THE BASICS

• Must follow Companies Act 2006 requirements

• Company buys the shares from estate/shareholder

• Shares are cancelled

• Remaining shares normally increase in value

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COMPANY SHARE PURCHASE TAXATION OF PREMIUM

• Paid by company

• No corporation tax relief as for capital purpose

• No P11D charge on shareholders.

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COMPANY SHARE PURCHASE TAX SAVING

Income tax @ 40% £690

Employee’s NI charge @ 2% £34

Company gross cost

Premium paid under own life in trust £1,000

Employer’s NI charge @ 13.8% £238

Total gross cost to company £1,962

Company net cost

Corporate tax relief at 19% £373

Net cost of £1,589

Assumes 40% tax-paying employee and 19% corporation tax-paying company. Tax rates 2018/19.

less

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COMPANY SHARE PURCHASE TAX SAVING

Income tax @ 40% £690 N/a

Employee’s NI charge @ 2% £34 N/a

Company gross cost

Premium now paid under CSP £1,000 £1,000

Employer’s NI charge @ 13.8% £238 N/a

Total gross cost to company £1,962 £1,000

Company net cost

Corporate tax relief at 19% £373 N/a

Net cost of £1,589 £1,000

36% saving

Assumes 40% tax-paying employee and 19% corporation tax-paying company. Tax rates 2018/19.

less

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COMPANY SHARE PURCHASE TAXATION OF BENEFITS FOR COMPANY

• Should be tax free as a capital receipt

• Minute and write to local inspector purpose of policy

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COMPANY SHARE PURCHASE TAXATION OF PURCHASE PRICE ON ESTATE/VENDOR

Avoiding being taxed as a distribution (s1033 Corporation Tax Act 2010)

• Must be unquoted trading company

• Must be for the ‘trading purposes of the company’

• See SP2/82

• Must have been owned by the vendor for five years

• Three years if bought from the estate

• Advance clearance available

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COMPANY SHARE PURCHASE CGT EFFECT

CGT on death

• Should be no CGT on purchase from the estate

• All estates re-valued on death

CGT on critical illness

• CGT may arise on a CI purchase

• Entrepreneur’s relief may be available

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COMPANY SHARE PURCHASE VERSUS OWN LIFE IN TRUST

CGT on company share purchase

• Company buys and cancels shares

• So remaining shares increase in value

• CGT base price would be original subscription price


CGT on own life under a business trust

• Deceased shareholder’s shares are a new purchase

• So CGT base price is purchase price


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• Frank and Alan are 50:50 shareholders • Business valued at £1.1 million on Alan’s death • Original subscription was £50,000 each • Frank decides to sell the business for £1.1m after Alan’s shares have been bought Assumes 2018/19 rates. Personal CGT allowance and disposal costs ignored.

Own life in trust Company share purchase

Value of existing shares £550,000 £1,100,000

Original subscription £50,000 £50,000

Gain £500,000 £1,050,000

Tax @10% (assuming entrepreneur’s relief)

£50,000 £105,000

CGT on new acquisition 0 N/a

Total CGT £50,000 £105,000

Additional CGT £55,000

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COMPANY SHARE PURCHASE SOURCE OF PURCHASE FUNDS

• Must be first paid out of available distributable profit

• If insufficient will be treated as reducing capital

• If so, must sign statement to creditors

• Supported by auditor

• Can’t sign – can’t buy!

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COMPANY SHARE PURCHASE ACCOUNTING TREATMENT

Accounting treatment of policy?

Not available for profit calculation

Is available for profit calculation

Abbey Engineering - Balance Sheet Fixed Assets Tangible Assets Plant and Machinery Computer Furniture and Fittings Motor Vehicles Improvements to premises

This year 10,406 12,392 13,401 41,196

6,807 84,202

Last Year 2,002 6,732

10,700 31,479 - 50,913

Current Assets Stocks Debtors & Prepayments Cash

27,123

302,136 61,551 390,810

52,870

342,143 298 395,311

Creditors : Amounts falling due within one year Hire Purchase Bank Loan & Overdraft Trade Creditors Sundry Creditors & Charges Corporation Tax

21,672 68,125

205,014 98,360

7,186 400,357

16,680 114,713 182,503

61,708 1,133 376,737

Net Current Assets (9,547) 18,574 Total Assets less Current Liabilities

74,655 69,487

Creditors : Amounts falling due after one year Hire Purchase Bank Loan

26,204 -

26,204 48,451

20,629 28,125

48,754 20,733

Provision for Liabilities and Charges

7,310 4,432

Net Assets 41,141 16,301 Capital and Reserves Called up share capital Profit and Loss account

10,000 31,141

2

16,299

Total Capital employed 41,141 16,301

Balance sheet only?

Abbey Engineering - Profit & Loss Account This Year

Last Year

Turnover Cost of Sales

1,222,501 707,111

575,266 361,922

Gross Profit 515,390 213,344 Other Operating Expenses

439,624 199,607

Operating Profit Investment Income

25,766

15,977 41,743

13,737

95 13,832

Interest Payable and similar charges

16,837 8,107

Profit on Ordinary Activities before taxation

24,906 5,725

Tax on profit on ordinary activities

10,064 3,046

14,842

2,679

Retained Profit brought forward

16,299 13,620

Retained Profit Carried Forward

31,141

16,299

P&L account?

Abbey Engineering - Balance Sheet

Fixed Assets

Tangible Assets

Plant and Machinery

Computer

Furniture and Fittings

Motor Vehicles

Improvements to premises

This year

10,406

12,392

13,401

41,196

6,807

84,202

Last Year

2,002

6,732

10,700

31,479

-

50,913

Current Assets

Stocks

Debtors & Prepayments

Cash

27,123

302,136

61,551

390,810

52,870

342,143

298

395,311

Creditors : Amounts falling due within one year

Hire Purchase

Bank Loan & Overdraft

Trade Creditors

Sundry Creditors & Charges

Corporation Tax

21,672

68,125

205,014

98,360

7,186

400,357

16,680

114,713

182,503

61,708

1,133

376,737

Net Current Assets

(9,547)

18,574

Total Assets less Current Liabilities

74,655

69,487

Creditors : Amounts falling due after one year

Hire Purchase

Bank Loan

26,204

-

26,204

48,451

20,629

28,125

48,754

20,733

Provision for Liabilities and Charges

7,310

4,432

Net Assets

41,141

16,301

Capital and Reserves

Called up share capital

Profit and Loss account

10,000

31,141

2

16,299

Total Capital employed

41,141

16,301

Abbey Engineering - Profit & Loss Account

This Year

Last Year

Turnover

Cost of Sales

1,222,501

707,111

575,266

361,922

Gross Profit

515,390

213,344

Other Operating Expenses

439,624

199,607

Operating Profit

Investment Income

25,766

15,977

41,743

13,737

95

13,832

Interest Payable and similar charges

16,837

8,107

Profit on Ordinary Activities before taxation

24,906

5,725

Tax on profit on ordinary activities

10,064

3,046

14,842

2,679

Retained Profit brought forward

16,299

13,620

Retained Profit Carried Forward

31,141

16,299

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Own life in trust pros Own life in trust cons • Outside of the company – not affected by

creditors • No problems with companies act requirements • Flexible if shareholder leaves – can usually

take the policy with them • New shares bought – reduced Capital Gains

Tax (CGT) liability on eventual disposal

• More complex application process • Possible Inheritance Tax (IHT) and CGT

complications if not set up correctly • May need to equalise • Premiums paid by company are P11D

Company share purchase pros Company share purchase cons • Simple set-up • No trust/IHT considerations • No equalisation • Seen to be company sponsored • Company pays premiums – no P11D charge

back on shareholders

• Less flexible if a shareholder leaves – assignment can create a P11D charge

• Complex purchase process – must follow CA requirements

• Must purchase from profits or possible creditor problems

• Higher CGT liability on eventual disposal • Not suitable for new shareholders (time

restrictions) • Not applicable to PLCs

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COMPANY SHARE PURCHASE CHECKLIST

1 • Have the shares been held long enough?

2 • Is there sufficient retained profit to purchase shares

and maintain dividend strategy?

3 • Is the company relatively free of creditors?

4 • Do they have key person cover to meet creditor

liabilities?

COMPANY SHARE PURCHASE CASH FLOW MODELLING

TODAY’S WEBINAR

Here’s what we’ve covered:

• The advantages and disadvantages of a company share purchase

• The tax implications including capital gains tax

• How a company share purchase compares with own life plans written in trust

• How to use cash flow modelling software to help sell business protection

THE LEARNING OBJECTIVES

40

Questions?

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London EC3V 0RL.

April 2019 PRP8PN0144

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succession planning company share purchase€¦ · estate/vendor . avoiding being taxed as a...

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