Is your company shareholding right is the question that is tumbling around in my head. What sparked the idea for this blog was a meeting with a businesswoman on Wednesday. She wanted a chat about growing and valuing her business. Ultimately, she’d love to sell it and we got onto the topic of who owns the shares in her company. We’ll take a closer look in a minute.
The purpose of this is to give you some ideas about shareholdings and taxes. And the reason for that is if you sell or extract cash you get to keep more if your company shareholding is right. Let’s discuss
- Shares
- Sell the Business
- Retirement Relief
- Entrepreneurs Relief
- Summary
Shares
The vast majority of companies have a share structure. Whoever owns the shares owns the company. Monty and Breda Dunne own Monty Carlow Ltd. A successful trading company, it makes parts for some pharma companies. The authorised share capital of Monty Carlow Ltd is 100,000. That’s the number of shares the company can issue. But the issued share capital, the number of shares actually issued, is 100.
Monty owns 50 shares and Breda owns 50. Breda is a nurse and apart from being a director of the company has nothing to do with it. In fact, she hates the place and resents all the time that Monty slaves away in there. Time that could be better spent sipping cocktails at their favourite bar in Sorrento. She’d even settle for a meal out in Leighlinbridge at this stage. Monty would like more time to play golf and take more holidays, but he can’t get the staff. And when he does get them, they can’t stick the pace.
The company has been in business a long time and is profitable, making on average €200,000 a year. And that’s after Monty’s six-figure salary and €50,000 pension contribution. Monty loves golf and is itching to get back out on the course after a recent hand injury. He even bought a new green blazer after watching The Masters on Sky over the weekend. He can’t wait to show it off in the clubhouse after the President’s Fourball.
Sell the Business
Monty will be 56 next week and he thinks the time is right to either sell the business or pass it on to his son Tom. Tom is working there for the last 2 years and gets on well with customers and staff too. Monty gives Reg a shout and they meet to see what the company is worth and to discuss a sale or transfer to Tom.
Reg runs some numbers and comes up with a draft valuation of €900,000. Monty wants to know that if he sells the business, for that number, what would he be left with? Reg knows his tax reliefs and knows that Breda will pay Capital Gains Tax on her share at 33%
| Sales proceeds Monty | €450,000 |
| Less cost of shares | €50 |
| Gain | €449,950 |
| CGT 33% | €148,484 |
| Retirement Relief | €148,484 |
| CGT Payable | €0 |
| Sales proceeds Breda | €450,000 |
| Less cost of shares | €50 |
| Gain | €449,950 |
| Less Personal exemption | €1,270 |
| Taxable Gain | €448,680 |
| CGT 33% | €148,064 |
| Retirement Relief | €0 |
| CGT Payable | €148,064 |
Ok, so of the €900,000 they’ll have €752,000 left after taxes. Monty thinks that amount is lower than he’d like. He has €200,000 in savings and would love to have the security of having a million. Would be nice to let the boys know in the golf club too.
Reg’s Advice
Reg had advised him to transfer Breda’s shares to him a few years back and he asks the question nervously.
“Reg what tax would I pay if I did what you told me to do a few years ago and transferred Breda’s shares to me?”
Seventy-five thousand euros. So, that’s a tax saving of €73,000. Monty is kicking himself and won’t be telling the lads in the clubhouse about that one. He then asks Reg if it would have been expensive to do that at the time. Reg thinks about it. The answer is no. About €300 to do the paperwork. There would be no
- CGT and
- No Stamp Duty
Monty moves on to talk about the Champions League final. He thinks Monty’s got a raw deal.
Retirement Relief
Shareholdings and tax relief go hand in hand. The reliefs are there to reward entrepreneurs who manage and run businesses. There’s an active involvement in the business piece and that’s why Breda didn’t get any CGT relief.
On a sale to a third-party the Retirement Relief [RR] threshold is €750,000. Provided the sales proceeds are €750,000 or less and you meet the conditions there’s no CGT to pay. To qualify you must be
- Over 55 and
- Own the shares for at least 10 years and
- Be a working director for at least 10 years of which 5 years you must be a full-time working director and
- Own a certain percentage of shares.
An individual must own 25% of the shares to qualify. However, a person can own 10% of the shares once 75% of the company is owned by the individual and their family.
In Monty Carlow Ltd if Breda had 10% of the company, she’d have enough shares to qualify, given that Monty owns 90%. But she still wouldn’t get the relief as she would fail the working director rule.
Paradise City Ltd
Axel and Duff own 50% each of Paradise City Ltd selling vinyl records to old lads with too much money. Axel’s wife Rose is very much involved in running the business, so he wants to give her some of his shares. He gives her 20%. She won’t get Retirement Relief on that 20% because between her and Axel they own 50%. If she got 25% then she could qualify once she met all the conditions.
Rose doesn’t have to own the shares for 10 years from the date of getting them from Axel. His ownership period will transfer to her. But she would have to meet the working director test and be over 55 too, of course.
With two spouses involved in running a business, it’s possible to double the reliefs. The relief of €750,000 is a lifetime limit for an individual. If both qualify that becomes €1,500,000.
Entrepreneurs Relief
This is another CGT relief and is easier to meet the conditions than Retirement Relief. Entrepreneur’s Relief [ER] is on the first million of gains. That is liable to tax at 10% and not 33%.
Let’s assume that Monty took Reg’s advice a few years ago and Breda transferred her shares to him. He doesn’t sell the company in 2023 but he gets an offer in 2024 for €1 million. His CGT computation would look like this.
| Sales Proceeds | €1,000,000 |
| Less Cost | €100 |
| Gain | €999,900 |
| CGT 10% ER | €99,990 |
| CGT 33% | €329,967 |
| Tax saving | €229,977 |
The tax saving is €230,000 on the first million. He would claim Entrepreneurs Relief, in this case, even though he would qualify for Retirement Relief too. For RR his liability would be €125,000. [50% of €1,000,000 – €750,000]
There is no age rule and the holding period for shares is 3 years and not ten.
The minimum shareholding is 5% but there is a time rule. For Entrepreneurs relief you must be
- A director or employee
- Spend not less than 50% of your time in the service of the company in a managerial or technical capacity
- Spend that time for a continuous period of 3 years in the 5 years immediately before the disposal of the business assets.
A 5% shareholding is quite achievable, you would think. Yet, we have seen some companies where a spouse is working full-time in the business and doesn’t own shares. Or owns some shares but less than 5%.
Again, as the relief applies to the individual, both spouses can qualify.
Sell Paradise City Ltd
It’s 2027 and Pearl Jam Records makes an offer to buy Paradise City Ltd for €5,000,000. Back in 2023, Axel gave Rose half of his shares so Axel owns 25%, Rose owns 25% and Duff owns 50%.
Rose meets all the conditions for ER. She owns the share for over 3 years and spends more than 50% of her time running the business. Her CGT liability will look like this.
| Sales Proceeds | €1,250,000 |
| First €1,000,000 x 10% | €100,000 |
| Balance €250,000 x 33% | €82,500 |
| Net Proceeds | €1,067,500 |
Axel’s CGT liability will be the same as Rose’s. Duff’s CGT liability will be
| Sales Proceeds | €2,500,000 |
| First €1,000,000 x 10% | €100,000 |
| Balance €1,500,000 x 33% | €495,000 |
| Net Proceeds | €1,905,000 |
While it’s a nice big chunk for Revenue he’s happy enough. He plans to visit the Amazonian jungle with his mate Slash.
Summary
Where a spouse is working in the business it makes sense for him/her to have a shareholding to enjoy the tax reliefs. The lowest shareholding is 5% for ER and 10% for RR but that goes to 25% if not a family company.
You need to be careful when transferring shares to a spouse or civil partner. Transfers after you hit 55 can eat into the lifetime limit for Retirement Relief. While there is no CGT or stamp duty on the transfer, the value of the shares will reduce the €750,000.
The opposite of that is a spouse owning shares in a business but he or she is in no way involved in running the business. Like in Breda’s case, half the sales proceeds went to her, with no reliefs.
As advisors, this is something we get asked a lot when setting up companies for clients. What should my company shareholding be? While our focus is on the tax considerations of a business sale, we will look at a business transfer from Monty and Breda to Tom in a future blog.
Do you want to know if your company shareholding is right to maximise the tax reliefs available? If so, Start here
