Buyouts made simple

RS writes: I am an employee with a small shareholding in a private company. The major shareholder holds 90% of the shares and is contemplating retirement. We have considered a buyout but I understand that transferring shares from one shareholder to another may involve a tax burden and inheritance tax issues. Are there any tried and tested ways in which the major shareholder can transfer his shares over a three to five year period?

Answer

Business succession involves a number of taxes, writes Tim Stovold, partner at Kingston Smith LLP. Assuming that the purchasers are paying "market value" for the shares, there should not be an inheritance tax (IHT) issues for the majority shareholder. Instead, he will be subject to capital gains tax on the gain. If the company has always been a trading company, it is likely that the exiting shareholder will benefit from business asset taper relief, which would reduce the rate of capital gains tax to an effective rate of just 10%.

A common way of handling a purchase is to form a new company that will become the holding company of the target. The shareholders exchange their old shares for shares in the new company and the exiting shareholder exchanges his shares in the old company for cash from the new holding company.

Alternatively, the exiting shareholder could sell his shares directly to the individuals who wish to acquire the company. The disadvantage to this is that any cash used by the new shareholders to pay for the shares will come from taxed income, so for every £100 needed, a higher rate tax payer would need to earn £169 before tax and National Insurance.

If the purchasers pay less than market value, the Revenue will tax the discount.