Buying out director from ltd company can you help ?
Discussion
I did something similar and it gets complicated quickly.
You really need an experienced accountants advice. In my case the accountant of the director being bought out disagreed with the company accountant, both chartered and well experienced. As HMRC can take an interest in a number of aspects of it we agreed on the most conservative route.
This won't help much but working out the best structure would have better done in advance. Now a loan is in place options will be limited.
Again no use to you but having been in the position myself of having more than one shareholder in a ltd be very clear in writing what expectations are for any future buyout / retirement etc in advance of setting anything up. Even seemingly reasonable people get mercenary very quickly when it comes to money.
You really need an experienced accountants advice. In my case the accountant of the director being bought out disagreed with the company accountant, both chartered and well experienced. As HMRC can take an interest in a number of aspects of it we agreed on the most conservative route.
This won't help much but working out the best structure would have better done in advance. Now a loan is in place options will be limited.
Again no use to you but having been in the position myself of having more than one shareholder in a ltd be very clear in writing what expectations are for any future buyout / retirement etc in advance of setting anything up. Even seemingly reasonable people get mercenary very quickly when it comes to money.
What the OP is saying is that the COMPANY has to borrow the money first and then has to lend those funds to an individual so that he can then use that money to pay another outgoing shareholder/director.
First of all, the OP will now have a loan from the company which -
a) could be subject to a penalty Corporation Tax charge under Section 455.
b) could be subject to a PAYE Benefit in Kind charge if the amount borrowed exceeds £10,000 and a proper commercial rate of interest is not charged to the borrower.
The outgoing director/shareholder may have a Capital Gains Tax issue (or even an Income Tax/NI issue) to address depending on how he handles this transaction).
First of all, the OP will now have a loan from the company which -
a) could be subject to a penalty Corporation Tax charge under Section 455.
b) could be subject to a PAYE Benefit in Kind charge if the amount borrowed exceeds £10,000 and a proper commercial rate of interest is not charged to the borrower.
The outgoing director/shareholder may have a Capital Gains Tax issue (or even an Income Tax/NI issue) to address depending on how he handles this transaction).
trickywoo said:
Possibly also stamp duty?
Yes.A possible route, but one which might give the outgoing shareholder income tax treatment rather than potentially capital gains tax, is for the company to borrow money, and buy back his shares. In this way no loan is created between the company and the OPs friend. But it also depends on who the current shareholders are, commercially this route would only work if there are only 2 of them.
Bear in mind the S455 charge referred to by Eric is temporary. It will be repaid by HMRC as the loan is repaid. It is effectively a cashflow issue.
Eric Mc said:
Although it can be a real bugger getting the S455 tax back. It's best not to let the situation arise in the first place.
Share buybacks used to need HMRC (or Inland Revenue as was) approval in advance. I think that's not the case any more. Maybe Alpine can confirm?
No approval required, but it's difficult to get CGT treatment, and if you satisfy the conditions, you can get clearance from HMRC. Some obvious advantages of CGT treatment are lower rates, bigger nil band and ER.Share buybacks used to need HMRC (or Inland Revenue as was) approval in advance. I think that's not the case any more. Maybe Alpine can confirm?
blindswelledrat said:
Although conversely, if it is a small 2-shareholder company it definitely can be quite straightforward.
1)Company takes the loan
2) Company purchases the shares back from the shareholder
3) Remaining director now controls all the shares.
Yes, as above.1)Company takes the loan
2) Company purchases the shares back from the shareholder
3) Remaining director now controls all the shares.
BUT, the original shareholder might get income tax treatment on the buy back = bad answer.
lexi 1 said:
Thanks for all the replies yes he brought the shares of the company this is something that had happened a few months ago the leaving shareholder was a right **** and would not have it any other way.
What's the proposed dividend way out as mentioned of it the business is strong and has cash in the bank the amount was over 100k for your information
?? What's the proposed dividend way out as mentioned of it the business is strong and has cash in the bank the amount was over 100k for your information
So - does this new director now have an overdrawn director's loan account?
If he does, what is the size of the balance he owes back to the company?
What date did the loan account become overdrawn?
How does he plan to repay the money back to the company?
Has he paid back any money yet?
Does your brother not have an accountant working this for him and giving him advice on the matter?
It's impossible to make any definitive statements when the information given is so sketchy.
If he does, what is the size of the balance he owes back to the company?
What date did the loan account become overdrawn?
How does he plan to repay the money back to the company?
Has he paid back any money yet?
Does your brother not have an accountant working this for him and giving him advice on the matter?
It's impossible to make any definitive statements when the information given is so sketchy.
Eric Mc said:
So - does this new director now have an overdrawn director's loan account? No
If he does, what is the size of the balance he owes back to the company?
What date did the loan account become overdrawn?
How does he plan to repay the money back to the company? no idea yet
Has he paid back any money yet? No
Does your brother not have an accountant working this for him and giving him advice on the matter? yes my mate wanted a second opinion
It's impossible to make any definitive statements when the information given is so sketchy.
If he does, what is the size of the balance he owes back to the company?
What date did the loan account become overdrawn?
How does he plan to repay the money back to the company? no idea yet
Has he paid back any money yet? No
Does your brother not have an accountant working this for him and giving him advice on the matter? yes my mate wanted a second opinion
It's impossible to make any definitive statements when the information given is so sketchy.
lexi 1 said:
Yes
The S455 charge will apply then depending on how long the loan is outstanding for. I'm guessing the dividend point was that the company could pay him a dividend as and when it can, and he uses that money to repay the loan. He will obviously be taxed on the dividend, but the company will get back the S455 tax. The S455 tax is really dividend tax paid up front. You answered "No" to my question about whether the director now has an overdrawn loan account.
My hunch is that you don't really know what I mean by "an overdrawn director's loan account".
This is when a company lends money to one of its directors.
This sounds to me EXACTLY what the situation is.
HMRC does not like overdrawn director's loan accounts and will hit the company or the individual for tax if the situation is not corrected.
As I mentioned earlier, if he owes more than £10,000 to the company AND the company is not charging him a proper rate of interest on the loan, he will be deemed to have obtained a "Beneficial Loan" from the company and he will be taxed under the PAYE Benefit in Kind system accordingly.
This needs to be returned under payroll regulations - currently by filing a Form P11D at the end of the tax year.
And, as I also mentioned earlier, the company MIGHT have to pay a penalty Corporation Tax charge on the unpaid balance of this loan if it remains unpaid more than 9 months after the end of the company's financial year end date. As Alpinestars said, if this Section 455 Corporation Tax has to be paid to HMRC, they will refund it to the company once the company can show that the loan has been cleared.
However, this can be a long drawn out process and it is best not to get into that situation in the first place.
My hunch is that you don't really know what I mean by "an overdrawn director's loan account".
This is when a company lends money to one of its directors.
This sounds to me EXACTLY what the situation is.
HMRC does not like overdrawn director's loan accounts and will hit the company or the individual for tax if the situation is not corrected.
As I mentioned earlier, if he owes more than £10,000 to the company AND the company is not charging him a proper rate of interest on the loan, he will be deemed to have obtained a "Beneficial Loan" from the company and he will be taxed under the PAYE Benefit in Kind system accordingly.
This needs to be returned under payroll regulations - currently by filing a Form P11D at the end of the tax year.
And, as I also mentioned earlier, the company MIGHT have to pay a penalty Corporation Tax charge on the unpaid balance of this loan if it remains unpaid more than 9 months after the end of the company's financial year end date. As Alpinestars said, if this Section 455 Corporation Tax has to be paid to HMRC, they will refund it to the company once the company can show that the loan has been cleared.
However, this can be a long drawn out process and it is best not to get into that situation in the first place.
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