Borrowing for business investment - options

ben0850

Hi All, I am in a bit of a quandary and in need of some advice! I am in a lucky position to be a salaried director in a company, I have been offered the chance to become a shareholder by purchasing shares and in essence becoming a full member of the board (not as glam as it sounds). Its pretty low risk, with entrep relief from HMRC i can buy shares at a 25% discount but would need in excess of 100k to 'buy in'... The company is profitable in good order and is long standing.. Thoughts appreciated as to what options i may have. I only have around 30k of equity in my house and have only recently changed mortgage (bad timing i know)..

MattMattMattUK

ben0850 said:

Hi All, I am in a bit of a quandary and in need of some advice! I am in a lucky position to be a salaried director in a company, I have been offered the chance to become a shareholder by purchasing shares and in essence becoming a full member of the board (not as glam as it sounds). Its pretty low risk, with entrep relief from HMRC i can buy shares at a 25% discount but would need in excess of 100k to 'buy in'... The company is profitable in good order and is long standing.. Thoughts appreciated as to what options i may have. I only have around 30k of equity in my house and have only recently changed mortgage (bad timing i know)..

It is unlikely you will be able to borrow the money from a bank, especially as you lack the equity to draw down in some way. Is there a specific reason the company are seeking £100k from you now, do they need the funding for something, is the company tight on funds etc.?

If you do not mind the question, what is your annual remuneration package and what dividend has the company issued as a percentage on average over the last few years? Is there any real value in the shares, or is this just a theoretical value, eg is there actually an ability to dispose of them at will afterwards or are you largely tied to the company or another existing shareholder wanting to buy them? What percentage of the company would you own and what would that put the theoretical capitalisation at?

My opinion would be that if the company genuinely want to get you truely onboard and tie you in for the long term, they would be willing to agree a salary/share package, together with potentially adding the shares as part of a performance linked remuneration deal. If they are purely looking to raise funds, then asking you to buy £100k of shares would be the action they would take...

ben0850

Hi Matt, thanks for your reply. I'm on circa 55k per annum and this would increase to circa 80k once I became a shareholding director. I am able to cap my salary and not take the uplift to offset against share purchase but this would still be taxed as my income so in essence doesnt give me a lot. The company is a ltd co with a significant amount of capital in the bank (runs in the black). All shareholding directors have an equal holding and the £ is the amount required to obtain parity with the other share holding directors (thats the structure to ensure parity on dividends etc)..The actual value of the shares is agreed with HMRC / Companies house

[Deleted User]

Can they not do some sort of company loan? Other half is a partner in a law firm and they have some arrangement where the partners pay in using a loan from a bank (assuming they can't afford it) and the interest is paid annually, loan is repaid when retired and the investment is withdrawn

MattMattMattUK

ben0850 said:

Hi Matt, thanks for your reply. I'm on circa 55k per annum and this would increase to circa 80k once I became a shareholding director.

Do you mean that you are on £55k pa PAYE and you would expect to receive a dividend based on your share holding of around £25k pa? Or would they increase your PAYE salary because you are also a shareholder, then dividend would be issued on top?

ben0850 said:

I am able to cap my salary and not take the uplift to offset against share purchase but this would still be taxed as my income so in essence doesnt give me a lot. 

You would also be taxed on the dividend on any shares, as well as on the CGT upon sale, although mitigated by Business Asset Disposal Relief if you hold the shares for long enough and meet the other requirements. 

ben0850 said:

The company is a ltd co with a significant amount of capital in the bank (runs in the black). 

All I would advise is to be 100% sure on your due diligence, you would be putting a lot of eggs in the same basket with your employment and a £100k investment in the same company.

ben0850 said:

All shareholding directors have an equal holding and the £ is the amount required to obtain parity with the other share holding directors (thats the structure to ensure parity on dividends etc).

There is no requirement for this though, dividend is issued per share, so if say you purchased the shares over a 3/5 year period the dividend would still be paid out the same per share (as legally required), however you would in the interim period receive less due to a smaller shareholding.

ben0850 said:

The actual value of the shares is agreed with HMRC / Companies house

HMRC and Companies House have no say or control over share price/value, it is recorded there, but it does not mean you haev the right to redeem the shares at the value recorded.

Deleted_User said:

Can they not do some sort of company loan? Other half is a partner in a law firm and they have some arrangement where the partners pay in using a loan from a bank (assuming they can't afford it) and the interest is paid annually, loan is repaid when retired and the investment is withdrawn

Farfetch's suggestion would make the most sense, you agree to buy the shares, the company loans you the money to do so and you repay that until the total has been reached. If the uplift you mention at the start of your reply is in PAYE salary then that would be a enough to clear the loan in four years, if you were willing to pay some of your existing PAYE into the repayments on the basis that you would also be gaining dividend from the shares you could then clear the loan in less time. At the end of that period, when the loan was repaid, you would then have more income from your PAYE, a theoretical asset and hopefully an ongoing yield from that asset. 

maxsteam

ben0850 said:

Hi All, I am in a bit of a quandary and in need of some advice! I am in a lucky position to be a salaried director in a company, I have been offered the chance to become a shareholder by purchasing shares and in essence becoming a full member of the board (not as glam as it sounds). Its pretty low risk, with entrep relief from HMRC i can buy shares at a 25% discount but would need in excess of 100k to 'buy in'... The company is profitable in good order and is long standing.. Thoughts appreciated as to what options i may have. I only have around 30k of equity in my house and have only recently changed mortgage (bad timing i know)..

My first thought would be to wonder how a 25% discount can be calculated unless the shares are listed (HMRC and Companies House are not reliable valuers of shares, they will simply have accepted an accountant's number - the value of the shares is whatever they can be traded for but estimates can be made by looking at the statutory accounts). My second thought would be to wonder which the company wants most, your expertise on the board or your £100000. As an outsider, I am obviously neutral about the company while I would expect a director to be extremely positive.

It sounds like you are going to have to politely say that, because you have recently changed mortgage (or whatever reasons seems most appropriate), you will not be able to afford to take up the offer now but, if the offer is still on the table in a few years time, you would expect to be very interested.

It's not impossible that another alternative might be to draw up an employee share option scheme or share purchase scheme where part of your salary buys some shares every month.

In a reasonable company, I am sure that there will be flexibility. If you are being encouraged to produce £100k in the next couple of months, you should tactfully exercise caution.