Accountancy Matter, Advice Needed
Discussion
Hi,
I need some (high-level) advice on an accountancy matter. It'll take a bit of explanation so here goes ....
A family company exists to hold property. The property is in different locations and of different types but is all entirely held by the company, with no loans or mortgages. The property makes a small income each year.
The family comprises two sons, A and B, both of whom are directors of the company. A has two grown-up children, E and F. B has three grown-up children, J and K and L.
Shares in the company are owned in the following proportion:
A: 20%
B: 60%
E: 10%
F: 10%
Company has existed for many many years, always banked with the same people, always had the same firm family firm of accountants, etc etc etc.
For various reasons, A and E and F (i.e. one side of the family) wishes to take their share of the value of the property from the company and put it into other investments. You will notice that the shareholding of this side of the family amounts to 40%, which is correct. It is understood that A will relinquish his directorship of the company at the point of sale and A, E and F will no longer be shareholders - they are giving up all involvement with the company. B, J, K and L wish to carry on owning and running the company.
There is an up-to-date valuation of the property in question.
What is the easiest way of achieving this realisation of assets? The obvious solution would be for B, J, K and L to buy-out A and E and F but they can't afford to do this.
I am not an accountant but I can see a simple solution to this, although don't know whether it would work.
This is a real situation. All sensible answers welcomed, thanks.
I need some (high-level) advice on an accountancy matter. It'll take a bit of explanation so here goes ....
A family company exists to hold property. The property is in different locations and of different types but is all entirely held by the company, with no loans or mortgages. The property makes a small income each year.
The family comprises two sons, A and B, both of whom are directors of the company. A has two grown-up children, E and F. B has three grown-up children, J and K and L.
Shares in the company are owned in the following proportion:
A: 20%
B: 60%
E: 10%
F: 10%
Company has existed for many many years, always banked with the same people, always had the same firm family firm of accountants, etc etc etc.
For various reasons, A and E and F (i.e. one side of the family) wishes to take their share of the value of the property from the company and put it into other investments. You will notice that the shareholding of this side of the family amounts to 40%, which is correct. It is understood that A will relinquish his directorship of the company at the point of sale and A, E and F will no longer be shareholders - they are giving up all involvement with the company. B, J, K and L wish to carry on owning and running the company.
There is an up-to-date valuation of the property in question.
What is the easiest way of achieving this realisation of assets? The obvious solution would be for B, J, K and L to buy-out A and E and F but they can't afford to do this.
I am not an accountant but I can see a simple solution to this, although don't know whether it would work.
This is a real situation. All sensible answers welcomed, thanks.
Edited by 2Btoo on Wednesday 23 January 08:29
w1bbles said:
The first question I would ask is... is there a shareholders’ agreement? It would be unusual in this situation if there wasn’t one and it should state what the rules are in the event of some shareholders wishing to sell their shares.
This. If there isn't a shareholder agreement then it's a bun fight.
The market value of 40% of a company that owns property is a lot less than 40% of the value of the property.
The company can carry out a purchase of its own shares.
To do this it will no doubt have to dispose of assets and there will be tax implications for the company in doing this.
There will also be tax implications for the shareholders.
Best to get a professional valuation and advice on tax implications, when they see how much tax is due they may reconsider.
To do this it will no doubt have to dispose of assets and there will be tax implications for the company in doing this.
There will also be tax implications for the shareholders.
Best to get a professional valuation and advice on tax implications, when they see how much tax is due they may reconsider.
Perhaps - but it depends if there is a shareholders’ agreement and what it says.
springfan62 said:
The company can carry out a purchase of its own shares.
To do this it will no doubt have to dispose of assets and there will be tax implications for the company in doing this.
There will also be tax implications for the shareholders.
Best to get a professional valuation and advice on tax implications, when they see how much tax is due they may reconsider.
To do this it will no doubt have to dispose of assets and there will be tax implications for the company in doing this.
There will also be tax implications for the shareholders.
Best to get a professional valuation and advice on tax implications, when they see how much tax is due they may reconsider.
Guys,
Thanks for the answers.
The shareholders are in agreement, but I think you are asking a different question about a shareholders agreement. Is it possible to set up a shareholders agreement once a company is already in existence?
I am aware of the tax implications, and that is one of the bigger factors at play. To complicate that aspect, A and B are both in their 70's so one of the questions is whether to arrange this before their demise or after. Additionally, much of the property is agricultural land so there is agricultural rates relief which makes things more interesting again, but this is detail.
We have taken professional advice from the family accountancy firm who have done things for many many years. Their solution is horrifically complex; setting up additional companies, selling shares from one company to another, merging the companies and folding the companies who no longer have the shares. My understanding of accountancy matters is limited (I run my own business but employ an accountant so I don't need to get involved) but I can't believe that the solution is as complex as has been mooted.
If someone could explain how a company can purchase it's own shares, in simple terms, that would be helpful. Also, why would the market value of 40% of a company be less than the value of 40% of the land it owns?
I will be discussing this matter with my own accountant in due course. However he is very busy at the mo with personal tax returns so I'm not going to get any time with him for a bit.
Thanks again for your input.
Thanks for the answers.
The shareholders are in agreement, but I think you are asking a different question about a shareholders agreement. Is it possible to set up a shareholders agreement once a company is already in existence?
I am aware of the tax implications, and that is one of the bigger factors at play. To complicate that aspect, A and B are both in their 70's so one of the questions is whether to arrange this before their demise or after. Additionally, much of the property is agricultural land so there is agricultural rates relief which makes things more interesting again, but this is detail.
We have taken professional advice from the family accountancy firm who have done things for many many years. Their solution is horrifically complex; setting up additional companies, selling shares from one company to another, merging the companies and folding the companies who no longer have the shares. My understanding of accountancy matters is limited (I run my own business but employ an accountant so I don't need to get involved) but I can't believe that the solution is as complex as has been mooted.
If someone could explain how a company can purchase it's own shares, in simple terms, that would be helpful. Also, why would the market value of 40% of a company be less than the value of 40% of the land it owns?
I will be discussing this matter with my own accountant in due course. However he is very busy at the mo with personal tax returns so I'm not going to get any time with him for a bit.
Thanks again for your input.
2Btoo said:
Guys,
. Also, why would the market value of 40% of a company be less than the value of 40% of the land it owns?
Thanks again for your input.
As an open market valuation very few people will want to be a minority shareholder, so in isolation the market for the shares is restricted.. Also, why would the market value of 40% of a company be less than the value of 40% of the land it owns?
Thanks again for your input.
However as you are in agreement then all the stuff about shareholder agreements and minority value etc doesn't really matter. It's all about the most efficient way of extracting the cash.
desolate said:
However as you are in agreement ..... It's all about the most efficient way of extracting the cash
Perhaps I should have stressed this a little more - everyone is very much in agreement. It really is an exercise in A, E and F taking 40% of the value out of the company and ceasing to be shareholders, while reducing the tax implications and the accountancy fees. The scheme proposed by the current accounts has fees to make you weep. (A cynic would suggest that it's probably the single biggest bill they will have produced in the last 10 years or more.) Thanks for your help. This thread has given me a great starting point for a more detailed discussion with my accountant - which is exactly what I wanted. It sounds like a way forward could be for the company to sell 40% of the holdings and then purchase the shares from A, E and F. Does it matter what type of company it is? I have heard 'trading' and 'holding' mentioned as company types but don't know how relevant this is.
You don't need a 'shareholders agreement' to enable a company to purchase its own shares but you do need the shareholders to agree which they do appear to.
The issue of whether it is a trading company or an investment company is significant in relation to the tax position of the shareholders, being a trading company would enable the shareholders to claim entrepreneurs relief reducing their capital gains tax liability.
The issue of whether it is a trading company or an investment company is significant in relation to the tax position of the shareholders, being a trading company would enable the shareholders to claim entrepreneurs relief reducing their capital gains tax liability.
SpringFan,
Thanks. This is really helpful. I've just checked on Companies House and it simply lists the company as a 'Private Limited Company'.
I hadn't thought about the Entrepreneurs Relief aspect. This would be nice but I think you can only claim this once in a lifetime can't you? If so then some of those who would be 'selling up' would benefit but others wouldn't.
Thanks again to everyone for their help. A bit of googling has led me to this page about company buy-backs of shares, which I haven't read but will do when I have a few mins.
https://www.accaglobal.com/pk/en/technical-activit...
Thanks. This is really helpful. I've just checked on Companies House and it simply lists the company as a 'Private Limited Company'.
I hadn't thought about the Entrepreneurs Relief aspect. This would be nice but I think you can only claim this once in a lifetime can't you? If so then some of those who would be 'selling up' would benefit but others wouldn't.
Thanks again to everyone for their help. A bit of googling has led me to this page about company buy-backs of shares, which I haven't read but will do when I have a few mins.
https://www.accaglobal.com/pk/en/technical-activit...
The definition of a trading company is not precise but generally speaking if you hold farm land and farm it you are trading but if you just rent it out it is an investment company.
There are some grey areas in between such as share farming.
One for your accountant to advise on.
There is a £10M cap on lifetime gains for Entrepreneurs relief rather than a specific number of claims.
There are some grey areas in between such as share farming.
One for your accountant to advise on.
There is a £10M cap on lifetime gains for Entrepreneurs relief rather than a specific number of claims.
It sounds like there will be a balancing act between Entrepreneur's Relief (ER) and Inheritance Tax (IHT) planning, depending on disposal route and the likelihood of A living for 7 years after the transaction.
Without resorting to trusts (and extra fees) would the following be the basis for something workable? As will be obvious to anybody who is, I am not a tax specialist!
If IHT is the driver:
D & E sell their shares to A for £1. The company borrows against the property assets and immediately lends B, J, K and L sufficient for them to purchase the 40% share from A.
A benefits from ER and A gifts 10% each (or any other amount) to D & E, free of IHT if A survives 7 years.
The company repays the commercial mortgage from rental income, and B, H, and I repay their loan(s) to the company from future dividends.
if ER is the driver
D & E sell their shares to A for for market value. The company borrows and immediately lends B, J, K and L sufficient for them to purchase the 40% share from A, D & E.
A, D & E benefit from ER.
The company repays the commercial mortgage from rental income, and B, J, K and L repay their loan(s) to the company from future dividends in the same way.
Without resorting to trusts (and extra fees) would the following be the basis for something workable? As will be obvious to anybody who is, I am not a tax specialist!
If IHT is the driver:
D & E sell their shares to A for £1. The company borrows against the property assets and immediately lends B, J, K and L sufficient for them to purchase the 40% share from A.
A benefits from ER and A gifts 10% each (or any other amount) to D & E, free of IHT if A survives 7 years.
The company repays the commercial mortgage from rental income, and B, H, and I repay their loan(s) to the company from future dividends.
if ER is the driver
D & E sell their shares to A for for market value. The company borrows and immediately lends B, J, K and L sufficient for them to purchase the 40% share from A, D & E.
A, D & E benefit from ER.
The company repays the commercial mortgage from rental income, and B, J, K and L repay their loan(s) to the company from future dividends in the same way.
Edited by sideways sid on Wednesday 23 January 15:09
Edited by sideways sid on Wednesday 23 January 15:10
sideways sid said:
It sounds like there will be a balancing act between Entrepreneur's Relief (ER) and Inheritance Tax (IHT) planning, depending on disposal route and the likelihood of A living for 7 years after the transaction.
Without resorting to trusts (and extra fees) would the following be the basis for something workable? As will be obvious to anybody who is, I am not a tax specialist!
If IHT is the driver:
D & E sell their shares to A for £1. The company borrows against the property assets and immediately lends B, J, K and L sufficient for them to purchase the 40% share from A.
A benefits from ER and A gifts 10% each (or any other amount) to D & E, free of IHT if A survives 7 years.
The company repays the commercial mortgage from rental income, and B, H, and I repay their loan(s) to the company from future dividends.
if ER is the driver
D & E sell their shares to A for for market value. The company borrows and immediately lends B, J, K and L sufficient for them to purchase the 40% share from A, D & E.
A, D & E benefit from ER.
The company repays the commercial mortgage from rental income, and B, J, K and L repay their loan(s) to the company from future dividends in the same way.
Doubt there is ER if it is a property investment company. Without resorting to trusts (and extra fees) would the following be the basis for something workable? As will be obvious to anybody who is, I am not a tax specialist!
If IHT is the driver:
D & E sell their shares to A for £1. The company borrows against the property assets and immediately lends B, J, K and L sufficient for them to purchase the 40% share from A.
A benefits from ER and A gifts 10% each (or any other amount) to D & E, free of IHT if A survives 7 years.
The company repays the commercial mortgage from rental income, and B, H, and I repay their loan(s) to the company from future dividends.
if ER is the driver
D & E sell their shares to A for for market value. The company borrows and immediately lends B, J, K and L sufficient for them to purchase the 40% share from A, D & E.
A, D & E benefit from ER.
The company repays the commercial mortgage from rental income, and B, J, K and L repay their loan(s) to the company from future dividends in the same way.
Edited by sideways sid on Wednesday 23 January 15:09
Edited by sideways sid on Wednesday 23 January 15:10
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