CGT - Share buyback

Heisenburg81

All,
For CGT treatment to be allowed instead if income tax on a share buyback, two of the conditions are;
- After the buyback, there must be a 75% reduction in the vendors shareholding. Associates of the vendors holding are grouped with the vendors in this calculation - Associate for this area is deemed to be spouse/minor children.
- After the buyback there must no longer be a connection between the vendor and the company - ie. Less than 30% control of the issued share capital - Again associates holdings are grouped with the vendors.

Getting to the crux of the question - A Close company consisting of two shareholder/directors (Husband & Wife) each holding 50% of the issued share capital of €2 ordinary shares.
There is a large age gap between both and the husband is at retirement age and wants to pass his shares to his son who has worked as an employee for the past ten years and is now ready to take the reigns (trade benefit test will be approved).

If the company buys back the husbands 50% shareholding - as per points 1 & 2 above, the spouse (associate) will still retain 50%, so, combining the husbands and associates (spouse) holding after the buy back would be 50%, thus not a 75% reduction. Also would still be a 50% connection.

Am I correct in my understanding of the above situation? Would both have to have their shares bought back to avail of the CGT treatment - and then in effect have the company as a single member company with the son as sole director/member?

Many thanks.
H

exaisle

Firstly, I think the company cant buy back both shares....there has to be at least one share...

To avail, you could (I think) split the existing shares, making them 50cent each. The shareholding would be 4, so if the company buys back his two, and buys back one of the wife's, then there's a 75% reduction.

There's probably a better way of doing this so I'm open to correction..

But as always, best idea is to consult an accountant!

CIARAN_BOYLE

Would it not be better to set up a situation where the son can buy the fathers share and the mothers share and the parents can avail of retirement relief paying no taxes rather than worrying about cgt vs it.

Heisenburg81

CIARAN_BOYLE wrote: »

Would it not be better to set up a situation where the son can buy the fathers share and the mothers share and the parents can avail of retirement relief paying no taxes rather than worrying about cgt vs it.

Yes, the plan would be to cancel the Fathers shares once bought back and issue new shares to the son. But need to make sure CGT treatment can be availed of first, then can get retirement relief.. but the 75% and 30% rules need clarity...
Spouse is a lot younger so couldnt get retirement relief.
Would inter spousal transfer of shares work and then issue new shares to son?
This must be very common scenario in close companies so hoping people have detailed info on the tax strategies for succession planning.

Heisenburg81

exaisle wrote: »

Firstly, I think the company cant buy back both shares....there has to be at least one share...

To avail, you could (I think) split the existing shares, making them 50cent each. The shareholding would be 4, so if the company buys back his two, and buys back one of the wife's, then there's a 75% reduction.

There's probably a better way of doing this so I'm open to correction..

But as always, best idea is to consult an accountant!

Thanks for that. Interesting.

barneystinson

CIARAN_BOYLE wrote: »

Would it not be better to set up a situation where the son can buy the fathers share and the mothers share and the parents can avail of retirement relief paying no taxes rather than worrying about cgt vs it.

Why would you want to have the son paying for shares, out of his after-tax income, if there's cash available in the company to effect the same result, or go some/all of the way towards achieving it?

The biggest issue always in family owned businesses is how to get accumulated cash out in a tax efficient way, so this relief is quite a generous and useful one.

exaisle

Gentlemen...I bow to your superior knowledge :-)

As Heisenburg81 says....interesting!

Heisenburg81

Can anyone give a definitive tax efficient/compliant strategy for this?

Lockedout2

I'd imagine that lots of posters know the answer to your question but I doubt anyone would give a detailed proposal.

You or your friend should approach your/their accountant to get advice specific on the set of circumstances in this case from a tax advisor.

Heisenburg81

Its actually for a course I am doing in tax. Lecturer is not replying to e mails.

Lockedout2

What values are involved?

What age is the wife?

Can the wife transfer her shares to the husband?

Will the level of cash in the business qualify for RR?

dogsears

A tax efficient strategy for this is not too difficult where the son is over 18 which I assume he is meant to be. Bear in mind that the Revenue will normally give a ruling in relation to whether the trade benefit test is satisfied - and will tend to agree that test is satisfied where the transaction assists with a transition from one generation to the next (although its often good to be able to say there are generational differences and disagreements are arising so that its better for the older generation to exit). However in such circumstances they will expect to see the vendor (and associates) holding NO shares afterwards (except perhaps for a very small number kept for sentimental reasons). That may give you enough to come up with the strategy.

Heisenburg81

Lockedout2 wrote: »

What values are involved?

What age is the wife?

Can the wife transfer her shares to the husband?

Will the level of cash in the business qualify for RR?

€2 share capital fully paid up.
€450,000 net assets.
Wife is 53.
Sufficient revenue reserves to fund buyback per C Act.
If inter spousal tfr done would have to convert to single member company before buyback?
May be prudent for one parent to retain a 50% share in event of son not working out in the role..
Crux of my question is - Can the husband get CGT treatment instead of the Income Tax distribution treatment? Is the fact that the wife will still have 50% after buyback going to disqualify CGT treatment due to the 75% reduction rule and 30% connection rule as she is an associate of the vendor?

54and56

Is this guide from Revenue the correct methodology for establishing the value of the shares? If so and the strategy of splitting into 4 shares is adopted with the husbands 50% and the wife's 25% shareholdings being purchased by the company would the husbands 50% shareholding have the recommended 20% - 30% minority discount applied to them and the recommended 50% - 70% minority discount applied to the wifes 25% shareholding in order to arrive at the combined buyback value which Revenue will be happy with?

What if there was a shareholders agreement in place which said departing/exiting shareholders must have their shares purchased at "fair value" i.e. without the application of minority discounts? Do Revenue insist on the application of minority discounts for the purpose of valuing shares regardless of whether the company is happy to purchase minority shareholdings at full pro-rata value?

Mr. Incognito

Heisenburg81 wrote: »

Can anyone give a definitive tax efficient/compliant strategy for this?

Yes. I can. Many others can here. But its tax advice, is banned and i charge for it in real life.

If its homework figure it out. Dont come here looking for people to give you gratis advice. Read the charter.

exaisle

Mr. Incognito wrote: »

Dont come here looking for people to give you gratis advice.

...because free advice is worth exactly how much you paid for it.... :-)

Heisenburg81

Fair enough regarding advice etc..

Can I just ask if the following is allowable strategy for a Shareholder/Director of a close co;

- Over 55, good cash in company - claim compensation for loss of office and get termination payment incl ex gratia. He is still a shareholder just not a director?

- This reduces the market value of the company by the cash/assets paid out

- Buyback of shares based on lower MV

- Retirement relief assuming criteria met

exaisle

Heisenburg81 wrote: »

Fair enough regarding advice etc..

Can I just ask if the following is allowable strategy for a Shareholder/Director of a close co;

- Over 55, good cash in company - claim compensation for loss of office and get termination payment incl ex gratia. He is still a shareholder just not a director?

- This reduces the market value of the company by the cash/assets paid out

- Buyback of shares based on lower MV

- Retirement relief assuming criteria met

You can certainly ask, but I would respectfully refer you to Mr.Incognito's earlier post...