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Sale of shares to employee

A client has just called to say he is giving 10% of the company to a new employee as an incentive to join. He will transfer the 10 shares for nil value.

The company does have a value (potentially several hundred £'000 in the right hands) so there is obvioulsy tax implications. I advised him it might need to be done through an incentive scheme such as EMI but he says no, "can't be bothered with all that stuff"

My knowledge in this area is limited so I do not want to advise him everything without looking into further or seeking advice elsewhere but my initial research has lead to two questions;

1) Should there be an issue of new shares instead

2) What are the tax implications for the employee, company and director selling the shares.

Any initial advice or pointers would be gratefully received

Thankyou

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23rd Sep 2010 11:57

I advise caution!

1. Whether the company issues more shares to the individual or the existing shareholder gives some of his shares there will be an effective transfer of value from your client and so he will be liable for capital gains tax on the effective gain, at 18/28%. Therefore no real tax difference between issuing new shares or transfering existing ones.

2. The new employee will be receiving employment related securities and so will need to pay tax on the value of shares received. This is done via his tax return. The existing director, will have a disposal for CGT (as above). No tax effect on the company, but a form 42 (Employment Relates Securities) will need to be submitted to HMRC at the end of the tax year.

Reasons not to issue shares as an incentive:

We recently had a situation where a client did the same and then later the employee left to set up a rival company. There was no share agreement in place so the employee was fully entitled to retain shares and receive accounts and attend meetings!

If you issue Ordinary shares to a minority shareholder this restricts the ability to remunerate the existing director by dividend, as all shareholders would need to receive the same dividend per share.

If the director is likely to want to sell the company in the reasonably near future I would advise against issuing shares to minority shareholders as it will reduce the ability to sell the entire shareholding and could reduce the attractiveness of the business to potential buyers.

Hope this helps!

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By blok
23rd Sep 2010 14:32

.

Simon, may I ask:

Are you sure that a fresh issue by the company will by a "disposal" by the shareholder for CGT purposes???

 

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23rd Sep 2010 15:59

Why no to EMI?

Yes there is cost involved with accountant preparing but that is deductible and then there is the CT deduction on the shares.

Surely cheaper than paying the tax! (on both parties)

If no EMI scheme is required then I would advocate new shares, and a valuation As the holding is 10%, after minority discount (potentially up to 90% of the value according to some reports and methods) the price for the new shares could be very low anyway.

The individual could pay for them from their wages or a bonus they receive.

This would be reported on a form 42 but as long as the value is fair and correct there is no issue. If it is deliberately low then there may be issues in the future.

Would your client consider you preparing a valuation and getting HMRC to agree now?

 

 

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By blok
25th Sep 2010 09:19

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Simon, may I ask that you reply to my post?  It is fairly fundamental to your answer.

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By blok
28th Sep 2010 17:47

.

Anyone care to comment on this?

Am I missing something obvious here?

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By blok
01st Oct 2010 14:01

.

I dont feel I should let this one go... anyone?

 

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05th Oct 2010 16:56

@ blok

Have just seen you looking for a reply - sorry for ignoring you old chap!

My understanding (correct me if I am wrong) is that there are no implications for CGT on the director giving the shares to the new employee unless they are connected (spouse, relative etc) in which case he will have a deemed disposal at MV for CGT purposes.

Likewise with the issue of new shares so no CGT there

Admittedly NOT my forte but that is my understanding without delving into the legislation!

I am sure others would have thoughts.

For the record, what (@ blok) would you advocate as the best course of action? I mentioned ny thoughts but maybe my thoughts are not the best!

Toodle pip!

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By blok
06th Oct 2010 12:07

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Hi Mr Dong!

I was just a bit worried that I was going mad. 

It would appear to me that Simon was suggesting that: should the company issues shares to someone (as opposed to a transfer by the shareholder) it would be a deemed disposal by the existing shareholders.  SImon, can you clear that one up?

Anyway, I do agree with most of the other comments, that without an approved share scheme in place, the individual will be receiving an asset by reason of his employment with the company.  these shares will be employment related and income tax (unlikely NIC) will be due on the value transfered to him.

These are the tax consequences on the individual and the question will be over valuation rather than if these are taxable or not.

Alternatively the shareholder could transfer 10% of his shares by gift to the incoming shareholder.  market valuations would again be required, appropriate discount applied given it is only a 10% shareholding.  This is a gift at undervalue and the tranferor should/could ask the transferee to elect to hold over the gain (section 165 TCGA 92).  All conditions for that particular relief would have to be met.

Starting from the end and working back, "the client is giving 10% of shares to a person as an incentive to join".  I would be tempted to issue new shares by the company, the comany could get a corporation tax deduction for the value, which is the upside.

You would need to consider the cashflows and the overall tax position of the company and the shareholders before concrete advice is given.

I appreciate that others may well have a different idea about this.

 

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By bgross
17th Nov 2010 12:31

bernard gross

you need to watch the value shifting rules

http://www.hmrc.gov.uk/manuals/cgmanual/cg58853.htm

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