[PPT] - SUCCESSION PLANNING COMPANY SHARE PURCHASE TODAYS WEBINAR PowerPoint Presentation

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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

f 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 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

f 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?

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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

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

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Questions?

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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