Planning opportunities around Retirement Relief and the buy back of shares

Brendan Burgess

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A friend of mine has raised a scheme which a neighbour of his has used. I have dismissed it as rubbish, mainly because it's not what the relief was intended for. He has said that his accountants also say that it's legitimate. I have told him to get his accountants to write down exactly how the scheme would work.

But this is how he describes it...

He is 60
His company earns about €100k profits before he takes a salary.
It has net assets of around €100k.
He works full time and the business is dependent on him, so I doubt it would be worth anything other than net asset value if he were to cease working for them.

He sells his son, an employee, one share.
The company buys the balance of the shares for €750k.
The company now owes him €750k.
He continues to work for the business but does not draw a salary.
The company makes a profit of €100k on which it pays Corporation Tax of 12.5%.
The company pays the remaining €87,500 to him to pay down the loan

After about 8 or 9 years, the loan is paid off.

Is there any basis for this at all?
Can a company buy back shares if it doesn't have reserves or a share premium account?

I understand that if a third party were to pay him €750k for the company, he would qualify for retirement relief.

Brendan
 
OK, I found this excellent summary from [broken link removed]

This particular scheme seems to be prohibited by Company Law

"It is worth noting some of the company law requirements of undertaking a share buyback:

  • the shares must be repurchased out of profits available for distribution...;"
But if the company had €750k of accumulated profits, it could actually avail of retirement relief on a share buy-back.

"Retirement relief

The Finance Bill 2010 introduced an amendment that provides that an individual can come within the scope of the retirement relief provisions on the proceeds of a disposal of shares pursuant to a redemption by a family company of its own shares. It was generally accepted that an individual could avail of retirement relief from capital gains tax on the buyback of their shares provided that all other conditions for relief were met before this provision was introduced."

So he could stop taking a salary now for 8 years and build up €750k of net profits in the company and then avail of it?

Brendan
 
Share buy back might not be the greatest way to do this. There is a gaping hole in the scenario. 1 It must be for the commercial benefit of the company. 2 The shareholder should cease association. 3 and most importantly
  • the shareholdermust no longer be connected with the company (broadly after the transaction the shareholder and his associates must own less than 30% of the company). His son owns 100%.
There is a way but this isn't it!
 
Share buy back might not be the greatest way to do this. There is a gaping hole in the scenario. 1 It must be for the commercial benefit of the company. 2 The shareholder should cease association. 3 and most importantly
  • the shareholdermust no longer be connected with the company (broadly after the transaction the shareholder and his associates must own less than 30% of the company). His son owns 100%.
There is a way but this isn't it!

Unless the son is a minor he is not an associate for the purposes of section 178.
 
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