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Tax Discussion Group: bringing on board a new director

The issue of how to bring on board a new director with an existing company formed the basis of an in-depth discussion on how shareholders would change, CGT implications and whether the old company should be wound up, Andrew McKenzie-Smart reports.

April 2020

 The accountant explained that he visited a client, Yankee Ltd, with three director/managers, Andrew, Bill and Colin who each own one third of the company. They explained that they had a new director, David, who is to join them in April.

David has been running a similar business called Whisky Ltd and he plans to transfer his clients over to Yankee Ltd while not planning to pay for his shares in that company. The other directors plan to give him 30% of Yankee Ltd with Andrew and Bill each own 30% of the company with Colin reducing his shareholding to 10%.

As Yankee Ltd has been trading profitably for a couple of years they have a positive balance sheet and so it is likely to have a material value.

It seems that they have not considered Colin’s Capital Gains Tax reducing his interest in Yankee Ltd.

The discussion concerned whether the new David should cease trading and wind up Whisky Ltd or whether Yankee Ltd should take over Whisky Ltd and issue shares to David in exchange for his Whisky Ltd shares.

There were a number of valid reasons for winding up Whisky Ltd or keeping it going which covered:

  • Its past tax compliance
  • Whether there was likely to be any run off issues with the company or continuous contract arrangements which might merit the company continuing. Such contract issues could be with customers, suppliers or other such arrangements.
  • Finally, they should also check on whether there are likely to be any possible litigation.

Turning to the shareholder issues, the discussion concerned:

  • Employment-related securities issues, which it was felt would not arise should Whisky Ltd be taken over by Yankee Ltd. It was thought that if Whisky Ltd was wound up that there could be an issue with the shares being issued to David. 

If Whisky Ltd was wound up then the business goodwill would not be transferred to Yankee Ltd, but while the business goodwill may be personal to David, there would be an advantage to retaining the company as a dormant subsidiary:

  • Company secretarial matters covering the issue of the shares to change the ownership from one third each to 30% each for three of them and 10% for Colin. It was suggested that the company should issue bonus shares to Andrew and Bill, but that Colin should waive his entitlement to these shares. 

David would then exchange his shares in Whisky Ltd for those in Yankee Ltd.

Each month (with the exception of July and August) the Tax Discussion Groups in Croydon and South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend & normally cover over a dozen tax issues raised by those attending.

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