Client to offer shares in business

jjdc

I'm an IT consultant, LTD company, outside ir35, working with existing client for a couple of years, contract ends in Oct next year.
Background, I was a joint director of another company of 11 staff providing hosting/dev support to this client (around 8 years) and a number of others. I'm no longer dir of this company, started out on my own but this client has taken me on to provide same service.

Client now wishes to give me 10% shareholding. IR35 is one issue which im looking at, but main question is tax. How does it affect me? Is it only when I come to sell shares? I presume they cant just 'give' them away, director isnt in best of health either. Think theyre looking to float company in next few years. Just dont want to be hit with a huge tax bill! No idea what shares are worth, client around £2.5m turnover / £500k profit

norsefox

I am quite interested in the outcome of this.  I expect my company to approach a management buyout, funded by our bank at some point in the future.

Like you, when I looked into this it did seem that there would be a substantial tax liability should the shares/equity not be bought, but offered.

Are share options a possibility?  I understand this guarantees the ability to buy shares at a set price for a limited period of time (I believe up to 10 years), meaning the outlay doesn't need to be made right now.

I'll defer to someone who knows more than I...

Steve182

I know nothing of  your business or IR35 but I can tell you of my experience.

We sold our company in January (good timing!). We got an ebitda multiplier of 4.5 which was quite high for a number of reasons. We were approached at a time when not looking to sell and senior management have signed up to stay for minimum 5 years. Without that commitment to continue to support the company there would have been no deal. 

So rough ball park, if your £500K is ebitda and you can find someone to buy the company at a multiple of say X4 then your 10% would be worth £200K. Of course there is no guarantee of that multiple, especially if the MD is not in the best of health and is eager to sell without continuing to support the company. In some businesses the MD basically is the business and without them it's worth nothing. 

Regardless of the sell price I think you will just pay tax at 10% entrepreneurs rate on any profit from sale of your shares, providing that you are selling at least 5% of the total company shareholding and you have been a director for at least 2 years. If you don't meet this criteria it will be 32.5% CGT. Check HMRC website for full details. 

I will be doing my tax return soon and that's what our accountants have told us we will pay.