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Disposing of your Business - Company Liquidation

We have to give CJ Stander a mention. He announced his retirement in a dignified and understated manner. He could continue to play for another few years and earn great money. But for him, it isn't about the money but a desire to return to his family in South Africa. Us ordinary Joes view the life of a professional sports player as glamorous and full of riches. But it has to be pretty lonely at times, when in camps and family is at the other side of the world. Rugby players careers are short, and their bodies go through hell. CJ and his teammates, past and present, have provided us with brilliant moments over the years. Beating New Zealand and winning a test series in Australia are serious achievements. I wasn't surprised to see that CJ was a farmer. He will save a fortune on farm machinery as he can take on the role of tractor and front loader. Happy retirement CJ and thanks for all the great memories

Last week we looked at a company selling the assets of their business. This was Part 2 of 'Options To Exit My Business'. In case you missed it see here

This week we will continue along the same theme with another option to exit your business. We are going to look at liquidations and give a few examples of how this works.

What is a liquidation?

It is the formal means by which a company is wound up. The cash that this realises is for creditors and shareholders. Most of the liquidations that happen in Ireland are where the company is insolvent. This means that the company owes more than it has in assets. Usually, banks and financial institutions get paid first. Preferential creditors such as workers and Revenue are next in line. For this blog, we are not going to focus on companies that can't pay their debts. We are going to look at companies that have excess cash that can go to the shareholders of the company. The shareholders can put a company into liquidation. They need a vote of 75% or more of the shareholders to do this. This is a voluntary liquidation.

Payment for Shares

Generally, payment for shares in your company is liable to Income Tax. On a voluntary liquidation a cash payment for your shares is a capital payment. This can be helpful as the shareholder can avail of Capital Gains Tax reliefs.

Baz Luhrman owns 100% of the shares in Sunscreen Ltd for the last 5 years and works full-time in the company. Tan Fantastic Ltd makes an approach and wants to buy the assets of Sunscreen Ltd for €1,200,000. Tan Fantastic Ltd draws up an asset purchase agreement. Plant & machinery, workers, and contracts will pass from Sunscreen Ltd to Tan Fantastic Ltd. The Balance Sheet of the company looks like this

Plant & Machinery€150,000
Debtors€110,000
Cash €450,000
Total Assets€710,000
Creditors€90,000
Tax Creditors€60,000
Term Loan€50,000
Total Liabilities€200,000
Net Assets€510,000


While trading Baz passes a resolution to put the company into Liquidation. He appoints Clint Holland as liquidator. Clint immediately gets to work. He collects the money that the debtors owe. He pays off all the tax creditors, creditors, and the term loan with the available cash. Clint gets a valuation for the Plant and Machinery which comes to €100,000. So, the value of the assets that Tan Fantastic is buying is as follows;

Plant & Machinery€100,000
Goodwill€1,100,000


For Sunscreen there is no CGT on the sale of the Plant & Machinery. But Sunscreen has a large gain on the sale of Goodwill. As there is no base cost for the Goodwill the gain is €1,100,000.

Gain€1,100,000
CGT33%€363,000
Net Proceeds€737,000
Add cash for Plant & Machinery€100,000
Total Cash€837,000


After paying all the liabilities there is cash left in the company of €360,000. If we assume €60k for legal, accounting, and liquidator’s fees there would be €300,000 left in the company. Added to that is the total cash, after paying the CGT, of €837,000. So the total available cash left in the company is €1,137,000. Clint pays the balance of this cash out to Baz, as the sole shareholder.

What tax does Baz pay?

Baz will be liable to Capital Gains Tax on the payment to him as the payment arises from the winding up of the company. Without any reliefs, Baz's CGT will be

Sales Proceeds€1,137,000
Less Cost of Shares€100
Gain€1,136,900
Less Personal Exemption€1,270
Taxable Gain€1,135,630
Tax Payable33%€374,758


Let's have a look at what CGT reliefs Baz could avail of. He can't avail of Retirement Relief as he has only owned the shares for 5 years. So, he doesn't meet the 10-year ownership test. For more info on Retirement Relief click here

Baz has met the conditions for Entrepreneurs Relief. For more info on this see here. He has

  • Owned the shares for more than 3 years
  • Spent over 50% of his time working in a managerial or technical capacity in the business for more than 3 years
  • He owns more than 5% of the shares

Good news for Baz. This means that he will get the lifetime limit of €1,000,000 of sales proceeds at 10%. His CGT liability will now look like this

First €1,000,00010%€100,000
Balance of Taxable Gain €135,63033%€44,758
Total CGT liability€144,758


As you will see from the figures Baz has saved €230,000 with Entrepreneurs Relief.

The key to getting ER is that the company is carrying on a qualifying business up to the time the liquidator is appointed. So, in the case of Sunscreen Ltd, Baz could appoint the liquidator on a Thursday and stop trading one day later.

Also, the liquidation must complete within a reasonable time period. Revenue regard 2 years as being reasonable.

Retirement Relief

One needs to be careful here. Falcon Crest Ltd appoints a liquidator and Clint gets the job again. Freda Falcon owns all the shares. Clint collects all the debtors and pays off all the liabilities. After this, there is €100,000 in cash left. Also, there is a business premises worth €200,000 and machinery and equipment worth €75,000. If Clint transfers the premises and equipment to Freda, she won't get Retirement Relief. If Freda purchases the assets from Clint, so that cash of €275,000 comes into the company, then this would work. She could get Retirement Relief on the €375,000 distribution from Clint. She would of course have to meet all the conditions for the relief.

Summary

The above is to give you an idea of an option that could be available to you when you exit your business. The advantage of a liquidation is that the cash distribution is liable to CGT and not Income Tax. There are a few quirks to be careful on, so proper planning and advice will be essential.

Need help to exit your business? Call Deirdre on 051396703 and she will point you in the right direction. Or contact us and tells us a bit more about you and how we can help.



 

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