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bigduckontax
bigduckontax, Accountant
Category: Tax
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Experience:  FCCA FCMA CGMA ACIS
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I plan to retire soon and would like to leave my Company to

Customer Question

I plan to retire soon and would like to leave my Company to the employees and would like some advice as to the best way of doing this.
According to our balance sheet at any one point the company has assets of £2.5m of which £1.6m is cash the difference is made up of property, stock and trade debtors. I am trying to be fair and not stupidly generous and therefore my thinking is that Nik(the other shareholder and director) and I should share the £1.6m cash and I leave the company putting my shares into the employee benefit trust – ostensibly 55% of the company belonging to the employees.
The questions I need help with; is this a practical idea?, what would be the most tax efficient way? And have I overlooked anything fundamental.
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.

Hello, I'm Keith and happy to help you with your question.

Are both you and Nik leaving the company? On your basic planning any employee benefit trust would control the company which could leave him out in the cold, effectively up the creek without a paddle. He could be removed as a director by the trustees.

Expert:  bigduckontax replied 1 year ago.
I see you have not responded to my request for information so I will proceed on the basis that Nik is remaining. I have warned you of the possible consequences should he become a minority shareholder, but maybe he already is in that state.
If you disburse cash from the company that would constitute salary and as you are both directors that must be done through PAYE channels as a director is deemed to be an employee and must be so remunerated. On the other hand, if that cash is part of the disposal proceeds of your shares along with the transfer to the proposed trust then the whole value of your shares, which must be taken at a market value of the company, less their original cost would be a gain subject to Capital Gains Tax (CGT). You would be entitled to Entrepreneurs' Relief which would limit the CGT tax rate to 10% instead of the normal 18% or 28%. It thus becomes pretty obvious, with basic rate of income tax alone at 20%, that taking the cash as part of your share transfer would be a more attractive proposition for you personally.
One of the problems of market value of a private company in reality has little to do with its net assets. The company is worth what some third party is willing to pay for it which might, unfortunately, be rather less than the book value. HMRC don't see it quite that way; in their eyes it will be the book value for a CGT assessment.
In any event, the transfer of your shares amounts to a disposal and that triggers a CGT liability.
I do hope I have shown you the consequences of your proposal. It may be necessary to use a local, trusted professional to value the company and deal with HMRC on this matter.
Customer: replied 1 year ago.

Apologies for not replying was waiting for Nik to make up his mind as to what he wants to do??Retire or stay on?He is still undecided-Would the scenario change much if he did decide to retire?

Expert:  bigduckontax replied 1 year ago.
As far as you and your taxation affairs are concerned not a jot. The disposal of the business would still generate a CGT liability in your tax accounts and hi too if he decided to retire too. He would be in a similar situation to you if he decided to retire.
Please accept my apologies for a tardy response. I am answering your queries from a time zone 7 hours ahead of GMT, so I have just risen.
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3121
Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 1 year ago.
Thank you for your excellent support.

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