Termination of Director and DLA write off

Julia Crouch

The situation

Small company two owner directors each having one £1 OS

One Director is owed approx £20k by the company on his DLA.

The company sells some assets to the director to clear off part of the DLA but there remains a £10k credit balance. The director resigns and will not require the company to pay him back the remaining balance.

Writing off the DLA will attract CT on the amount written off, but what about the £1 OSC? A simple journal will clear the nominal value but this share might have an open market value in excess of £1 possibly £2K (hypathetical) and if this is the case could the £1,999 dr the DLA and cr a 'Share Premium Account' to reduce the DLA written off and so reduce the CT liability?

How would the value of the £1 be calculated and verified if this is possible?

Your comments and suggestions would be appreciated.

Julia

deanshepherd

What are you planning to do with the share?

If it is to be transferred to the other director then it's market value has no impact on the company at all.

If you are doing a buy back then I would be valuing that share at £10k! Complicated route to go down though.

Jmann

Julia Crouch wrote: »

Writing off the DLA will attract CT on the amount written off, but what about the £1 OSC? A simple journal will clear the nominal value but this share might have an open market value in excess of £1 possibly £2K (hypathetical) and if this is the case could the £1,999 dr the DLA and cr a 'Share Premium Account' to reduce the DLA written off and so reduce the CT liability?

Hi Julia

I am just having one of those moment and failed to understand paying ct on write of DLA. Would you be able to explain a bit in detail, please?

Is it because, write off would be a income for the company as the company no longer have to pay the loan?

Regards

Julia Crouch

Dean

I will advise whatever route stops the CT liability and I would imagine that that will be buying back the share i.e the journal and then valuing at the £10K so how do I go about this?


JMann

Basically, yes

AK002

Why would the director not want £10k?! It's "free money" he's throwing away?

Why not set up an agreement with the company to pay it back at £x a month?

Maybe i've missed something...

Bluewednesday

I'm sure I read just recently (and please Dean correct me if I'm wrong) that there are various formulae to value the share depending on the results and you have to get Revenue approval after the transaction takes place, which doesn't help if they don't agree your valuation!

I found it all in the Revenue manuals.

deanshepherd

It's not something I have been involved with in practice but it is my understanding that clearance is only required where you are seeking capital treatment of the distribution in the hands of the shareholder, rather than income treatment.

I am not sure that HMRC have a policy of questioning the valuation in these circumstances because the price that is paid IS the valuation. Although there may be a lifetime IHT issue if there is a significant under or over-valuation. Also, if I recall correctly, payment on a buy back has to be made in cash and not by way of settling a loan or transferring any assets.

There must be an easier way to resolve the issue in hand. Perhaps the leaving shareholder could assign the debt to another director. Again, that would give rise to an IHT issue in the hands of the leaving shareholder but it probably wouldn't result in any tax to pay.

Julia Crouch

**Bleep**,** Bleep**, Directors!

Thank you all for your help.

I think that my next step will be to spend some CPD time scanning and reading the Revenue manuals for the formula and any information there and the logistics of a possible buy back.

I strongly expect that the revenue will want the CT in full, but at least I now have some areas to look at.

Reasigning the loan is an interesting one though, especially as I do not act for the leaving shareholder

Bluewednesday

deanshepherd wrote: »

It's not something I have been involved with in practice but it is my understanding that clearance is only required where you are seeking capital treatment of the distribution in the hands of the shareholder, rather than income treatment.

I am not sure that HMRC have a policy of questioning the valuation in these circumstances because the price that is paid IS the valuation. Although there may be a lifetime IHT issue if there is a significant under or over-valuation. Also, if I recall correctly, payment on a buy back has to be made in cash and not by way of settling a loan or transferring any assets.

There must be an easier way to resolve the issue in hand. Perhaps the leaving shareholder could assign the debt to another director. Again, that would give rise to an IHT issue in the hands of the leaving shareholder but it probably wouldn't result in any tax to pay.

Yes capital treatment was where I had read it - just presumed it might be safe if it was carried out that way for all parties!! Obviously nothing is unquestionable for the Revenue though.

Julia Crouch

Information regarding the valuation of unquoted shares is tied up in the CGT pages and is delt with by the Shares and Assets Valuation pages on HMR&C website and you would be looking to calculate an open market valuation.

I cannot see a specific formula but the pages do list what would be expected to evidence the value calculated and there are various ratio indicators mentioned there.

You then send everything to the SAV department for approval for tax purposes and I would agree that it would appear that the decision would apply to the company as well as the individual, although it does not quite say that.

I cannot find anything regarding the possibility to reassign the loan but will research this more later. But since it seems like a good idea I am sure that it would not be allowed