Share purchase on planned retirement

Share purchase arrangements on retirement are generally left out of business succession arrangements for shareholders, such as those providing for purchase on death or critical illness, since the matter of funding for such an arrangement is principally an investment issue and far more expensive than funding for purchase on (insurable) death or critical illness.

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Where a planned purchase on retirement is contemplated, advance funding can, of course, be arranged but the matter is then of simple investment advice, depending on the term to retirement, investment profile of the individuals and funds available.  Funding can be achieved through ISAs, collective investments or, perhaps exceptionally, insurance based investments. 

Where advance funding is not feasible, then the availability of funds would need to be established at the time of retirement.  Borrowing by the other shareholders may be necessary and any interest on such borrowing should qualify for full tax relief.

Although the debt would be deductible against the value of the BPR qualifying shares as opposed to the borrowers other (non-relievable) assets.

In addition to the possibility of purchase by the co-shareholders, there are additional options for planned retirement of shareholders (all of this assumes that we are dealing with a non-family company, i.e. where shares do not pass on to the next generation).  These include:

  • purchase by a third party/ flotation - this may be something many company owners hope for as a means of capitalising their business on retirement, but obviously it will depend on the availability of a willing buyer and the price at the time, which is impossible to plan for.
  • own share purchase by the company. This, of course, assumes that at least one other shareholder will be left and, also that there will be funds available in the company (either directly or indirectly via borrowing) with the remaining shareholders wishing to carry on in the business.  Prior funding for this possibility could also be put in place and it is important to remember the various legal conditions that have to be satisfied for the purchase to take place, and the conditions that have to be satisfied to achieve the desired tax results.
  • compensation via a pension fund. This would involve advance planning for maximum extraction of capital from the company by injecting this capital into the pension fund for the shareholder and thus reducing the value of the company.  Such planning is appropriate where it is unlikely that the business is going to continue after the retirement of the owner (usually in the case of large majority shareholders, where one or possibly two are retiring at the same time).

Any gains arising as a result of sale may well qualify for entrepreneurs’ relief.  This can deliver an effective tax rate of 10% on gains up to a cumulative total of £10 million of qualifying gains.  After that, and subject to the annual exemption, the flat CGT rate of 10% or, more likely, 20% for higher or additional rate taxpayers will be due.


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