Exit planning is critical if you want to save tax.
Typically when a shareholder wants to leave a business, the company will buy back the shares, but often the company wants to pay in stages to ease the cashflow.
The problem is that buy back in stages generally means that Entrepreneurs Tax Relief can’t be used and to make things worse the buybacks will be tax as a distribution.
The Companies Act prohibits buy back by instalment, however HMRC Tax Bulletin 21 says…
The Board can only consider a request relating to a transaction which appears to be a valid PoS. The Companies Act 1985 lays down certain procedural rules which must be followed. Also, the consideration for the shares must be paid immediately and must be paid in money. The first of these requirements means that payment by instalments is not possible. It is, however, possible to make a contract under which successive tranches of shares are to be purchased on specified dates.
So here is checklist of things to consider to create a multiple completion:
- Ask HMRC for advance clearance – the buy back will be treated as a single event and subject to Entrepreneurs Tax Relief on the whole amount on day one
- Make sure your solicitor draws up an agreement that transfers beneficial interest on day one whilst retaining a legal interest
- Whilst the shares still exist beneficial interest has been disposed of
- Voting rights can no longer be exercised
- The creditor for deferred completion must not be loan capital
Clearly you will need professional advice from your solicitor and accountant to create a multiple completion contract.