SUCCESSION PLANNING COMPANY SHARE PURCHASE
TODAY’S WEBINAR HOUSEKEEPING • Questions can be submitted in the ‘Ask a question’ box below the main webinar feed • If you encounter any technical issues use the support option and then select ‘viewers’ and someone from BrightTALK will help you out 2
TODAY’S WEBINAR THE LEARNING OBJECTIVES 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
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. 4
COMPANY SHARE PURCHASE CUSTOM CONTROLS Company insures person Company insures person In the event of death or Benefits paid to company critical illness Benefits paid to Company Shares cancelled Company Benefits paid to company buys back shares Shares 5
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 6
COMPANY SHARE PURCHASE TAXATION OF PREMIUM • Paid by company • No corporation tax relief as for capital purpose • No P11D charge on shareholders. 7
COMPANY SHARE PURCHASE TAX SAVING Premium paid under own life in trust £1,000 Company gross cost Employee’s NI charge @ 2% £34 Income tax @ 40% £690 Employer’s NI charge @ 13.8% £238 Total gross cost to company £1,962 less 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. 8
COMPANY SHARE PURCHASE TAX SAVING Premium now paid under CSP £1,000 £1,000 Company gross cost Employee’s NI charge @ 2% £34 N/a 36% Income tax @ 40% £690 N/a Employer’s NI charge @ 13.8% £238 N/a saving Total gross cost to company £1,962 £1,000 less Company net cost Corporate tax relief at 19% £373 N/a Net cost of £1,589 £1,000 Assumes 40% tax-paying employee and 19% corporation tax-paying company. Tax rates 2018/19. 9
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 10
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 11
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 12
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 13
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 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 £50,000 £105,000 entrepreneur’s relief) CGT on new acquisition 0 N/a Total CGT £50,000 £105,000 Additional CGT £55,000 Assumes 2018/19 rates. Personal CGT allowance and disposal costs ignored. 14
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! 15
COMPANY SHARE PURCHASE ACCOUNTING TREATMENT Balance sheet only? P&L account? Abbey Engineering - Profit & Loss Account Abbey Engineering - Balance Sheet Fixed Assets This year Last Year This Year Last Year Tangible Assets 10,406 2,002 Plant and Machinery 12,392 6,732 Computer 13,401 10,700 Turnover 1,222,501 575,266 Furniture and Fittings 41,196 31,479 Cost of Sales 707,111 361,922 Motor Vehicles 6,807 - Improvements to 84,202 50,913 premises Accounting Gross Profit 515,390 213,344 Current Assets Stocks 27,123 52,870 Debtors & Prepayments 302,136 342,143 Other Operating Expenses 439,624 199,607 Cash 61,551 298 390,810 395,311 Operating Profit 25,766 13,737 Creditors : Amounts treatment falling due within one year 21,672 16,680 Investment Income 15,977 95 Hire Purchase 68,125 114,713 Bank Loan & Overdraft 205,014 182,503 41,743 13,832 Trade Creditors 98,360 61,708 Sundry Creditors & 7,186 1,133 Charges 400,357 376,737 Interest Payable and similar 16,837 8,107 Corporation Tax of policy? charges Net Current Assets (9,547) 18,574 Total Assets less 74,655 69,487 Profit on Ordinary Activities 24,906 5,725 Current Liabilities before taxation Creditors : Amounts falling due after one Tax on profit on ordinary 10,064 3,046 year 26,204 20,629 Hire Purchase - 26,204 28,125 48,754 activities Bank Loan 48,451 20,733 14,842 2,679 Provision for Liabilities 7,310 4,432 and Charges Retained Profit brought 16,299 13,620 Net Assets 41,141 16,301 forward Capital and Reserves Called up share capital 10,000 2 Retained Profit Carried 31,141 16,299 Profit and Loss account 31,141 16,299 Forward Total Capital employed 41,141 16,301 Not available for Is available for profit calculation profit calculation 16
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 • More complex application process creditors • Possible Inheritance Tax (IHT) and CGT • No problems with companies act requirements complications if not set up correctly • Flexible if shareholder leaves – can usually • May need to equalise take the policy with them • Premiums paid by company are P11D • New shares bought – reduced Capital Gains Tax (CGT) liability on eventual disposal Company share purchase pros Company share purchase cons • Simple set-up • Less flexible if a shareholder leaves – • No trust/IHT considerations assignment can create a P11D charge • No equalisation • Complex purchase process – must follow CA • Seen to be company sponsored requirements • Company pays premiums – no P11D charge • Must purchase from profits or possible back on shareholders creditor problems • Higher CGT liability on eventual disposal • Not suitable for new shareholders (time restrictions) • Not applicable to PLCs 17
COMPANY SHARE PURCHASE CHECKLIST • Have the shares been held long enough? 1 • Is there sufficient retained profit to purchase shares and maintain dividend strategy? 2 • Is the company relatively free of creditors? 3 • Do they have key person cover to meet creditor liabilities? 4 18
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 THE LEARNING OBJECTIVES 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
Questions? 40
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