Allotment of additional shares

Allotment of additional shares

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A close company is owned by two directors, A & B, who own the shares in the ratio 2:1. The company wishes to allot additional shares to the director A, who will pay the nominal value for the additional shares. Following the allotment their respective shareholdings will be in the ratio 70:30. This means that B's interest in the company has been reduced and A's interest been increased. Has there been a taxable (CGT) transfer from B to A.? How would one value this transfer? Are there any other tax issues I should be aware of?
Graham Bell

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By kenmoody
29th Jun 2007 14:34

Actually, I'm not sure if I agree with myself
Or maybe not completely.

I still can't see why such a minor change in the ratio of ownership is worth doing - 30% / 33% don't seem to be especially significant percentages where here are only two shareholders.

The additional shares acquired by A will be employment related - unless the get -out for shares acquired during the normal course of family or personal relationships applies (s421B(3) ITEPA 2003). If it does why not just allot additional shares pro-rata and then get B to gift shares to A, or just get B to gift a few without issuing any more. If there is any gain by B it could be held over under s165. HMRC do however say that although s421 refers to the transfer of shares being by an individual they accept that the get-out would apply to shares issued directly by the company.

If shares are acquired at an undervalue there is an employment income charge on general grounds as in Weight v Salmon - unless it can be argued that the acquisition is not by reason of the employment (which may well apply for transfers among family or friends).

If there is a charge on acquisition as I say this is just as general earnings so would be based upon the value in money's worth of the additional shares acquired. A 3% interest in a private company would of course be subject to heavy discounts given A presumably would not be regarded as a special purchaser for 3% since, as I say, the increase in A's % shareholding doesn't seem to have any special significance.

Be that as it may, there could still potentially be a charge under Chapter 4 if the increase in value of A's holding from 67% to 70% exceeds the amount taxable as employment income. Otherwise it would be easy to pass value in dribs and drabs if you were only taxed on the value of the 'parcel' of shares transferred.

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By kenmoody
28th Jun 2007 09:37

Have I got this straight?
They are changing a ration of 67:33 to 70:30. What is the point?

I don't see that the value shifting rules in s29 TCGA 1992 apply as B is not the controlling shareholder. However, if value is passing to A then this could be assessable as employment income under Chapter 4 Part 7 ITEPA 2003 (post acquisition benefits). The charge is on the MV of the benefit but is not further defined. I suppose it would be the marginal increase in value from 67% to 70%, rather than the value of the additional 3%, though to some extent we are in unchartered waters here.

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