Transferring my shares to my business partner

[Pitman]

For the last ten years I've run a company with my business partner. We owned the company 50/50. From the shareholder's agreement:

The Company is a private company limited by shares and has an authorised share capital of £10,000, divided into 100,000 ordinary shares of 10 pence each 50,000 of which are issued and fully paid.

The business has had some great years but more recently has found business tougher. Three months ago I left the day-to-day running of the business and stopped drawing a salary. I currently remain a director and 50% shareholder.

I plan to step away entirely next month and as part of the settlement I'd like to return the shares. The question I have, is whether there are gotchas for myself or the business to watch out for when doing this. e.g. if I simply return the shares rather than sell them back then is that legal? Does it value the company at £0? Is it going to look suspicious to the taxman?

Any advice appreciated.

 

[Ozzy]

Hi Pitman,
Either way you will need to in effect "sell" your shares to either the company as a buyback (if there are distributable profits to pay for them), or your partner buys them from you. If you gift the shares then as the company is trading and has some value he could still be deemed to have received a benefit in kind and be taxed on it.

As far as a procedure is concerned its pretty straight forward, but you are looking to dispose of an asset which would have tax implications.

 

[Pitman]

Thanks Ozzy. The shares were valued for an EMI scheme a while back so I suppose that would be the current value that I'd have to be paid for them unless they were re-valued. Alternatively I could gift them to my business partner but then he'd be liable for the tax.

 

[Pitman]

I got some legal advice. Just in case this is useful for anyone I'll repeat it here.

The shares can be gifted or sold back to the company. The company needs to be careful that it doesn't incur tax, whichever way.

One way is to use 'distributable reserves', which I understand is money reported at Companies House in the end of year filing. If there is any (even £1) then this can be used to buy back the shares without incurring a tax cost.

The other way is to revalue the company using HRMC. We've done that before. Obviously we'd need to make the case that the company is of low value.

Either way it was recommended that we get it rubberstamped by HMRC so that it doesn't bite the company in time to come.

 

[The Resolver]

In case anyone may misread the distributable reserves required to cover do not have to be in the last accounts as filed. It is also not strictly necessary ,if a large sum is involved, for the payment to be made in one lump sum.

There are other matters to negotiate such as an indemnity of you by the remaining director against any claims against the directors for past conduct ( eg if it is subsequently established that the company has in the past traded whilst insolvent or monies drawn down wrongly or late filing fines issued by Companies House in the future but for a time when you were a director etc).