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Passing on a company - company reorganisation - introduction

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When a shareholder wants to retire and pass on the family company, receiving cash for their shares, it may be possible to achieve this through a company reorganisation by way of a share exchange. In this way the remaining shareholders can buy out the departing shareholder without incurring any charge to capital gains tax and without using their own resources.

For example, assume that the shares in Oldco Ltd were held as follows:

  • 25% Mr Archer
  • 25% Mr Brown
  • 25% Mrs Clarke
  • 25% Mr Davies

Mr Archer wants to retire, pass on the family business to his children, who are also shareholders, and receive cash for his shares in Oldco Ltd. The children want to buy his shares and continue running the business. They form another company, Newco Ltd which acquires all the shares in Oldco Ltd. Newco Ltd pays Mr Archer cash for his shares and issues shares to Brian, Claire and David in exchange for theirs. The cash for the purchase of Mr Archer's shares can come either:

  • from the cash reserves of Oldco Ltd after Newco Ltd has taken it over;
  • or from a bank loan, for example, made to Newco Ltd and secured against the assets of its new subsidiary.

An alternative to a company reorganisation is for the company to purchase its own shares. If the conditions for a company purchase of own shares are met, consideration should be given to this method of passing on the family company as a potentially cheaper and easier solution than a company reorganisation.

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