COMPANY SHARE PURCHASE SUCCESSION PLANNING
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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.
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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
• Entrepreneur’s relief may be available
CGT on own life under a business trust
• Deceased shareholder’s shares are a new purchase
• So CGT base price is purchase price
• Entrepreneur’s relief may be available
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COMPANY SHARE PURCHASE VERSUS OWN LIFE IN TRUST
• 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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COMPANY SHARE PURCHASE VERSUS OWN LIFE IN TRUST
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
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
COMPANY SHARE PURCHASE CASH FLOW MODELLING
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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