Gift vs sale of shares in a private Ltd company

Implications & consequences of each option

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Hello

A client has built up a successful business, net profit circa £30,000 p.a. He & his wife each own 50 shares in the company. His son works for the business for a number of years and is paid market rate salary.  For succession planning the shareholders now want to transfer 10 shares each to their son, so the new shareholding split would be 40/40/20.  I don't think ERS applies as the shares are not being pased on by way of his employment, he will continue to be paid a salary and any dividends received will be additional. This is succession planning as he wishes to retire in five years.

As I understand it, he could either gift or sell the shares to his son, please could someone advise of the tax implications of each option?  

Gifting shares at market value, for example he values the shares at £450 / share (1.5 x net profit) Sells 10 shares x £450/share = £4,500 within personal CGT allowance. no further tax implications?

Selling shares for nominal £1 / share, would still treated as an arms length transaction, but within the CGT allowance.

Is there an advantage of doing it one way rather than the other?

Thanks

 

 

Replies (3)

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By MBK
22nd Feb 2017 13:10

In essence, it doesn't matter what price he puts on the shares (including Nil) because, being a connected party transaction, the deemed consideration is going to be OMV.

But, reading between the lines of what you say, Mum and Dad don't take a market salary. If that's the case, and a market salary was deducted from the £30k profit I suspect there would be little or no profit left and thus (potentially) no value in the shares.

Having said that, assuming it's a trading company, the best thing is probably to put in place a holdover election with the transfer of the shares so that there can be no question of tax being payable. It may mean losing the benefit of unused CGT annual exemptions, but removes the uncertainty.

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paddle steamer
By DJKL
22nd Feb 2017 13:14

I suspect you need more precise numbers re the MV of the shares to be passed irrespective of route.

If £30,000 profits ,is this after full MV salaries to Mum and Dad for what they do for the business (do they work in business?) or is this after say £8,060 salary each and they take the rest as dividends?

The reason I ask is that if the latter, and the business is not awash with assets, there may be virtually no value in the shares so frankly there will be little to worry about either route.

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By JWB
23rd Feb 2017 11:22

Thank you, yes it is a £8,060 and remainder taken in dividends situation. No assets in the company but it has been trading successfully for 5 years and has a wide client base.
So either selling or gifting is potentially fine, price irrelevant as MV would be deemed.
If they went for the holdover gift relief then isn't this potentially stacking up a CGT gain for the son in the future? Either way, they should complete a stock transfer form? and if no £ is passing hands there would be no stamp duty? and update Companies House when the confirmation statement falls due next.

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