Q: I’m a 50-50 partner in a small business. My partner and I built up the company from scratch, and growth happened quite organically. However, we’ve come to the conclusion that it will only ever be big enough for one owner-manager: one of us will have to bow out.
We still haven’t decided who should sell up, and I have a tonne of questions. If I sell, what are the tax implications? The amount involved would be between €20,000 and €40,000.
If I were to buy the shares, would it have to be from my own pocket? Could I borrow the money in the company name, or would it have to be my own? I had a brief chat with my bank, who said they’d only advance a personal loan, but I’m not sure if this is a legal requirement or just policy.
A: First off, I’d say that both you and your partner need independent professional advice. This is a very important transaction, and making a right mess of it would be costly. However, we can offer a few general pointers.
If the company has the cash available to support it, the most affordable way to do the transaction would be by way of a share buyback. The company would simply buy the shares of whichever shareholder wants out using its own money. After this is done, the shares can then be cancelled, leaving the other partner as the sole shareholder.
There will probably be tax to pay, though it may qualify as a Capital Gains Tax transaction rather than a distribution liable for income tax. This depends on certain conditions – the shares must have been owned for at least five years, and the buyback cannot adversely affect the company’s working capital.
If the company has to borrow money to fund a buyback, this is viewed as a distribution for tax purposes – the partner selling up will be liable for income tax at up to 52% rather than Capital Gains Tax of 33%. Your bank, as you’ve said, may insist on you borrowing the money personally for added security.
The only way to avoid tax on this entirely would be if the departing partner is over 55 and satisfies a range of conditions, including length of ownership and time spent working as a full-time working director of the company. In this instance, you or your partner may be able to claim retirement relief from Capital Gains Tax.
Again, this is something where your circumstances, those of your partner, and the current state of the company all have a significant impact. I’d advise you to contact us to set up an initial meeting, and we can then map out the best way forward.