Purchasing shares from another Director in Ltd Co.

[Dr_Gonzo]

I'm looking to possible purchase a few shares off a fellow Director in our Limited company.

A quick background to the company: Two directors (myself and my business partner) each with a 50% share holding. This is made up of 50 ordinary shares with a nominal value of £1 each.

The company was formed about 10 years ago to buy the company we worked for via an MBO. We both put in the £50 for the nominal value of our shares. To use some made up figures for simplicity, the value of the company we bought was £1M and we used a variety of financing options to make the purchase.

At present, lets say the company is valued at £800k (i.e. 200k less than the purchase price). There's also currently 100k outstanding borrowings.

My question therefore is: if I were to purchase one of my business partner's shares, what would be its value/cost? Would it be the £1 (nominal value); £8k (400k/50=8k); or £7k (800-100=700/2=350/50=7k)?

Also, as the value of the company has gone down, would my business partner be able to claim a loss on the shares sold to me?

Thanks!

[Eric Mc]

How much did he pay for the shares?

[Newc]

The £50 isn't relevant, ignore it. You both put in 0.5m for half the firm, gross of financing. If the firm is now worth 800k, then each share is valued at 80k, again gross of financing.

[Alpinestars]

Depends on how you arrived at 800k. It can be a debt free number, but doesn't have to be. If it is debt free, then each share is worth 7k.

You and your business partner are likely to be connected so any loss on the shares he sells to you can only be offset against gains he makes on sales of other assets to you.

Edited by Alpinestars on Friday 31st January 21:19

[Lawrence5]

Something is only ever worth what someone will pay for it..... pick a number you are comfy with and negotiate

Can't help but think the most expensive share out of the 100 is the 1 share that makes you the majority shareholder?

If you financed a £1m business but only have £100k debt left then it's profitable ? Not sure why you feel it's worth less at £800k ?

[Ozzie Osmond]

Eric Mc said:

How much did he pay for the shares?

^^^ This is the only thing that matters here. The taxable "gain" on the share will be selling cost minus purchase cost, subject to applicable tax reliefs.

As regards how much the shares are "worth" - that's entirely a matter of opinion. Possibly a 51% majority has some extra value, probably a 76% majority has some extra value. Otherwise just pick a figure and divide by the number of shares.

[Siscar]

They paid £1 a share, it says so in the OP.

The amount to pay now is whatever you both agree. There is logic to £800k - £100k / 100 to get £7,000 each, so that could be somewhere to start but the figure you end up with is genuinely whatever you are both happy with.

[Eric Mc]

Ozzie Osmond said:

^^^ This is the only thing that matters here. The taxable "gain" on the share will be selling cost minus purchase cost, subject to applicable tax reliefs.

As regards how much the shares are "worth" - that's entirely a matter of opinion. Possibly a 51% majority has some extra value, probably a 76% majority has some extra value. Otherwise just pick a figure and divide by the number of shares.

That's what I was trying to get at.

Whatever the original shareholder sells his shares for will determine the size of the capital gain. However, being the sale of shares in a trading company, the gain will be eligible for Entrepeneurial Relief.

[Dr_Gonzo]

Ozzie Osmond said:

^^^ This is the only thing that matters here. The taxable "gain" on the share will be selling cost minus purchase cost, subject to applicable tax reliefs.

So, if a share was sold for say £7k, would there be a 'gain' of £6,999 (as we 'paid' £1 for each share), or would there be a loss, as the the assets of the company that we bought, were £1M on day one?

Also, my, albeit limited, understanding of Entrepreneurs relief is that it can only be taken once. Therefore, if the 'gain' was £6,999.00, I assume it would be better to just use his capital gains allowance for this?

Thanks,

The Doctor

[Newc]

I don't really want to just type the same thing again, but I think I have to:  ignore the initial £100, it's completely irrelevant.  You haven't made 7k per share.

Or, to try put it another way, why do you think the asset value of the company can be disregarded when you calc the initial value but included when you calc the current value ?

[Ozzie Osmond]

Dr_Gonzo said:

So, if a share was sold for say £7k, would there be a 'gain' of £6,999 (as we 'paid' £1 for each share)

Yes

Dr_Gonzo said:

or would there be a loss, as the the assets of the company that we bought, were £1M on day one?

No, the asset value inside the company is of no relevance.

Dr_Gonzo said:

Also, my, albeit limited, understanding of Entrepreneurs relief is that it can only be taken once.

That's not really correct but there is a "lifetime maximum", currently £10 million.

Dr_Gonzo said:

'gain' was £6,999.00, I assume it would be better to just use his capital gains allowance for this?

The CGT allowance should be used every year if possible. If he has no other gains in the year then it would make perfect sense to use the annual CGT allowance for that purpose.

[Ozzie Osmond]

Just to add - in your "example" you appear to have acquired a company worth about £1m, paying only £100 for it. A very good trick indeed!
Is it fair to assume you actually paid a lot more than £1 to acquire each £1 share?
Your base cost for CGT purposes isn't just the nominal value of the share - the base value is what you actually paid for it.

[Dr_Gonzo]

Ozzie Osmond said:

Just to add - in your "example" you appear to have acquired a company worth about £1m, paying only £100 for it. A very good trick indeed!
Is it fair to assume you actually paid a lot more than £1 to acquire each £1 share?
Your base cost for CGT purposes isn't just the nominal value of the share - the base value is what you actually paid for it.

Hi Ozzie,

Thanks for the reply.

I was getting a little confused as this:

Ozzie Osmond said:

Dr_Gonzo said:

So, if a share was sold for say £7k, would there be a 'gain' of £6,999 (as we 'paid' £1 for each share)

Yes

Seems to contradict this:

Newc said:

I don't really want to just type the same thing again, but I think I have to: ignore the initial £100, it's completely irrelevant. You haven't made 7k per share.

Perhaps if I explain how the company came about it may make it clearer: Company XYZ LLP was a trading company. The partners in this company were retiring and two managers of XYZ LLP bought the assets of the company via a MBO. To do this a new Limited company ABC Ltd, was set up which purchased the assets to XYZ LLP for £1M. As initial share capital we put in £1 per share for 50 shares each (as advised by our accountants). To pay for the purchase a variety of financing options were taken out - some of which are still outstanding (circa £300k).

Hope that helps!

Thanks,

The Doctor

[Siscar]

I'm not sure where Newc is coming from, you put in £50 not half a million if the loans were taken out by the company.

So £6,999 is the gain on those figures.

[Newc]

Siscar said:

I'm not sure where Newc is coming from, you put in £50 not half a million if the loans were taken out by the company.

So £6,999 is the gain on those figures.

Well, Newc is mostly coming from the angle that the shares haven’t gone by 200x.

You created a shell company, NewCo, and put in £100.  NewCo is worth £100 and each share is worth £1.

An existing company, OldCo, is valued at £1m.  NewCo buys OldCo for £1m.  NewCo is now worth 1m and 100 pounds, and each share is now worth £10,001.  Result – trebles all round!  But wait – where did that £1m come from ?  It can only have come from equity injection from the owners, or debt financing.  It certainly didn’t magically appear on the balance sheet.

If It came from the owners then each share represents £10,001 worth of equity injection and is now worth £10,001.  Net gain per share – nil.

If it came from debt financing then each share represents the surplus of assets over liabilities, so £100 of equity plus £1m of OldCo value less £1m of financing debts owed gives net value of £100.  Net gain per share – nil.

If it came from a mix of debt and equity then apply the above in proportion and see that the net gain per share is still nil.

[Siscar]

Newc said:

Well, Newc is mostly coming from the angle that the shares haven’t gone by 200x.

You created a shell company, NewCo, and put in £100.  NewCo is worth £100 and each share is worth £1.

An existing company, OldCo, is valued at £1m.  NewCo buys OldCo for £1m.  NewCo is now worth 1m and 100 pounds, and each share is now worth £10,001.  Result – trebles all round!  But wait – where did that £1m come from ?  It can only have come from equity injection from the owners, or debt financing.  It certainly didn’t magically appear on the balance sheet.

If It came from the owners then each share represents £10,001 worth of equity injection and is now worth £10,001.  Net gain per share – nil.

If it came from debt financing then each share represents the surplus of assets over liabilities, so £100 of equity plus £1m of OldCo value less £1m of financing debts owed gives net value of £100.  Net gain per share – nil.

If it came from a mix of debt and equity then apply the above in proportion and see that the net gain per share is still nil.

Well we know that it was financed by debt, not equity injection, we also know that the debt has (in the example figures given) been paid down to £100k. Hence the logic of taking the current 'value' of £700k being the £800k valuation less the £100k outstanding debt, hence the gain per share of £6,999.