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Is there any tax on shares?

A professional partnership incorporated their business approx 3 years ago.  The 2 partners who had been in partnership for some 20 years became 50% shareholders.  

1 of the partners now wishes to retire and withdraw his directors loan account only.  He is then happy to cancel his shares or gift to the other shareholder

Does this then create a problem for the other shareholder in terms of being taxed on the value of the shares? He will then own 100% of the company.  There is value in the business.  Or does anyone believe that this event would be non-taxable?

Thanks for any guidance.

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By BKD
24th Jan 2013 20:22

Two potential problems

Without going into the details, on a gift shareholder A may have a capital gain (subject to holdover relief).

Shareholder B likely to face an income tax charge.

What they may want to do is, before A retires, have the company buy back his shares for a nominal sum. This ought to avoid the capital gains tax charge - I'll need to consider further whether the income tax charge would be avoided.

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25th Jan 2013 09:25

stamp duty dependent on the value placed on the repurchase of the shares by the company

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By trucker
25th Jan 2013 14:33

Company purchase of own shares

Could the company repurchase the shares to avoid an income tax charge on the shareholder staying in the company? 

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Just a thought

I'd agree that a POoS would probably avoid a CGT or IT liability on A.  B could face a charge under the employment-related securities rules (increase in value or S.447), is where I think BKD is still uncertain.

If the company repurchases the shares though for less than their value, isn't that also an IHT chargeable lifetime transfer (grossable and payable by the donor)?

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By BKD
25th Jan 2013 15:36

Exactly right, George

My uncertaitny lies exactly where you found it.

And good point about the IHT implications of an undervalue buy-back. (Could BPR apply? I assume not, but IHT isn't my area)

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Yes

BPR might well be available depending what's in the company.

For an increase in B's MV to be chargeable other than under S.447, the MV of the shares when acquired would have needed to have been artificially depressed.

If Dawn Primarolo's comments at ERSM90050 are to be believed, there shouldn't be a charge under S.447.

With a direct transfer from A to B, I'm not sure there would be an income tax liability, as it ought to be possible to contend that the shares aren't being acquired by reason of the employment, as it's an individual disposing of them in the course of his personal dealings, perhaps? See ERSM20220.

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Back to undervalued POoS

If CGT treatment applies would that not still be a deemed market value disposal under S.17 TCGA 1992?

So if you were purchasing for a nominal sum, you'd want to force income treatment?

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By BKD
25th Jan 2013 16:13

s17

Possibly, but most commentators seem to think that POoS will always be a bargain at arm's length (it is certainly the case that connected party rules cannot apply).

As for the income tax charge on transfer, there is certainly a case to be made, based on the long-standing relationship, that the shares were acquired otherwise by reason of employment.

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Aha!

Yes. I'd got myself confused. It's a gift that's always a disposal otherwise than a bargain at arm's length.

A sale might simply be a bad bargain.

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