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CGT Implications of Issuing Shares

CGT Implications of Issuing Shares

I have a client company which is very profitable (profits approx. £1m pa) - it has three shareholders all owning 30 ordinary shares each.

They want to invite another shareholder into the business who has a similar / complementary business which is currently loss making but which they feel has huge potential. This person would also become a director and receive a small salary & dividend etc.

They would like to issue 10 new ordinary shares to the new shareholder in consideration of him transferring his trade into their existing business.

Are there any capital gains tax implications for the existing shareholders because under the new structure they will own 30% of the shares each as opposed to 33.3% etc. i.e. do the S29 value shifting provisions apply and also are there any tax (benefit in kind) issues for the incoming shareholder? I don't think there are any CGT implications for the existing shareholders as it is a fresh issue of shares nor do I think that there are any tax issues for the incoming shareholder as he is not receiving shares by virtue of his employment etc. but any expert advice would be very welcome.

As ever, my apologies if my understanding is basic but I do not have a huge amount of experience in these matters.

Thanks

Aidan   

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By BKD
27th Feb 2013 12:29

No value-shifting

There may be tax issues for the incoming shareholder to consider:

He will need to decide whether or not to disapply s162.

He will more likely than not be treated as acquiring the shares by virtue of his [prospective] employment - because the exchange will, by defnition, be at MV, there should be no immediate problem but he may have to consider any restrictions attached to the shares.

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By asmyth1
27th Feb 2013 14:20

Why the disapplication of S162? Is this not to do with the transfer of an unicorporated business to a limited company?

The prospective shareholder trades through a limited company already - my apologies if I am misunderstanding something.

 

 

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By BKD
27th Feb 2013 14:42

No, my apologies ...

... for making unstated assumptions. I had assumed that the individual was transferring a sole trade. (in consideration of him transferring his trade)

 

So, he is getting shares in the new company in exchange for a transfer of business etc from his existing company? That being the case, it may be a little more complicated. I don't have time to consider at the moment, but will do so later - unless someone beats me to it.

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By blok
27th Feb 2013 14:49

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your post didnt say that and it was fundamental to the answer.

so his company will be transfering its trade to a new company and in return the company will be getting nothing.  But the shareholder will be getting new shares issued to him.  is that it?

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By asmyth1
27th Feb 2013 15:04

Yes that is correct - his company will merge its trade into the company owned by the other people and he will receive shares in their company in consideration.

His company is currently loss making (2 years trading losses of about £100k in total) and probably has no value but the shareholders of the other company think it might have some potential to make profits in the future and it also gives them an opportunity to eliminate a potential competitor and have him on their side etc.

My apologies if I did not make that clear.

 

Thank you.

 

 

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By blok
27th Feb 2013 15:40

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there will be a tax charge on the recipient of the 10%, clalculated by reference to the value of the 10%.  i still haven't worked out if that will be on a deemed distribution rate or at an employment taxes level.

whilst I think that through have you considered a share for share exchange? 

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