Sale of shares to raise capital

lisajayne1

I have a client who has limited company
100 shares, he owns 100% 1p Base Value
He wants to raise money to purchase new P&M

What would be the best way to do this ?

If he dilutes his shares then he is subject to CGT & the proceeds would belong to him so that is not really achieving his goal as the liabilities would increase due to increased DLA plus CGT issue

If he increases the shares in the company and sells these
The proceeds would then belong to the company

The value of the investment for 20% of the company is £50,000
I know the journal entry for the increase in share capital
Additional 20 shares & 1p
Dr DLA
Cr share cap
But what about the balance
Dr Bank
Cr ?????
Also is this equity finance & is it then subject to tax ?
Many thanks in advance

PeterC

I think your missing credit entry might be to the share premium account. I may have misunderstood the scenario but I would have thought the first debit would be Bank, rather than DLA. I presume that debt-based financing is not feasible, for some reason.

lisajayne1

PeterC said:

I think your missing credit entry might be to the share premium account. I may have misunderstood the scenario but I would have thought the first debit would be Bank, rather than DLA. I presume that debt-based financing is not feasible, for some reason.

Thank you Peter. This is something I have never encountered before.
Are there any tax liabilities for this?
Will the share premium just remain on the balance sheet as a credit balance?

I really do appreciate your help

PeterC

The share premium is a reserve, part of equity, and remains until the company is wound up, or there is a capital reconstruction. The only tax issues I can think of affect the new shareholder, on the eventual disposal of the shares. Dividend policy may change and this also has tax implications.

lisajayne1

PeterC said:

The share premium is a reserve, part of equity, and remains until the company is wound up, or there is a capital reconstruction. The only tax issues I can think of affect the new shareholder, on the eventual disposal of the shares. Dividend policy may change and this also has tax implications.

Thank you for not only answering this question but for being really kind. I have had bad experiences on here before, where I have been made to feel really inadequate and it has made me reluctant to use it as a support tool. Thank you for restoring my faith in the forum

Many Thanks again

Regards

Lisa

PeterC

Perhaps your previous experience relates to using an inappropriate forum. We are currently in the student forum. Maybe you should try the forum for accounting professionals.