Gift of shares by sole shareholder to his manager

Gift of shares by sole shareholder to his manager

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The sole shareholder and director of a company (call him 'A') has informally agreed that if he sells the company, he'll give his manager (b) 10% of the sales value. How will this work in tax terms?

Not looking for people to do my work for me here, just point out if I'm thinking off on the wrong tangent.

All that exists at the moment by way of contract is a brief mention in the contract of employment of B. So if A sells the company and gives B 10%, will it just be a gift? B had nothing to sell, so presumably it can't be a capital gain, and if it happens outside of his employment then it can't fall under income tax.

Another option is to make it more formal, and for A to transfer the shares now to B. Presumably there's no tax effect for A immediately, and there will only be one for B if he dies within 7 years in which case the PET becomes chargeable under IHT.

And then as long as B keeps the shares for 2 years before the sale, as it's a trading company he'll get 75% business rate taper relief on the disposal.

Lots of issues. Can anyone see if I've missed anything or gone seriously wrong somewhere? Time to hit the books...

Thanks, Andy.
Andy.

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By User deleted
02nd Jun 2005 08:50

Consider EMI Option?
The gift of shares to B will be deemed to be by reason of his employment and he will therefore be taxed upon receipt on the restricted (or unrestricted) market value at that time. The disposal by A will be subject to CGT.

Will the Company qualify to use an Enterprise Management Incentives scheme? if so, A could grant an option over 10% of his shares to B, exerciseable only upon a sale. The exercise price could be set at £nil if required.

In this way, A continues to hold the shares (and accrues business asset taper relief) until the date of exercise, whilst B's taper relief commences from the date of grant - until exercise no tax liability arises. If the option is granted with a £nil exercise price, the tax liability will be restricted to the difference between the exercise price and the lower of the market value at grant and the market value at exercise.

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By User deleted
02nd Jun 2005 15:10

Good point about EMI
Hadn't thought about EMI, so thanks for that comment. Certainly worth looking hard at.

I wonder what would happen, if, after A sold the company, B was simply gifted 10% of the proceeds by A. Would that be anything but a gift, only really entering into the tax realm by way of A's IHT?

Andy.

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