I have an unquoted company client with 6 shareholders, 2 of which are directors. Of the 4 non-director shareholders, 2 were directors until they retired and resigned last year. The other 2 are their pertners who were non-director employees until they also retired at the same time last year. The 2 current directors bought their shares from the former directors a number of years ago at market value and any tax arising was accounted for at the time.
Now, following their retirement, then 4 non-directors wish to gift their remaining shares to the 2 remaining directors. My question is, could this give rise to a benefit under employment related securities for the remaining directors, or would this not fall within the definition of "by reason of employment"?
Many thanks in anticipation of any assistance.
Replies (6)
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Perhaps a bit of both
By "partners" I assume that you are referring to such in the non-business sense. If so, it should be fairly easy to argue that the shares are transferred in the course of normal family, domestic etc affairs.
As for the other 2, it will depend on the circumstances, ie what relationship - beyond that involving the company - exists between the individuals?
Ah ...
... on that basis I'd say that the transfers would fall squarely within ERS. Exemption from the regime is by exclusion.
It doesn't matter who is making the decision - the test is of the capacity in which the recipient is receiving the shares. If someone is a director or employee and they receive shares or securities in their company then the default position is that they are within ERS unless specifically excluded. I can't see that exclusion would apply in this case (though it is somewhat subjective so you could always try - I'd put your chances of success at less than 50:50).
Personal relationship
I agree with BKD's comment that the chances are not good. However, lack of family relationship is not fatal to the argument - a personal relationship can count too. If the 6 are all good firiends of many years it might work.
Come back Graham and BKD
Ok, so the shares satisfy the definition or employment-related securities, unless Graham's personal relationship argument works, but where's the tax charge?
The ERS definition doesn't apply for s. 62 purposes, and we can still rely on not being by reason of employment using Lord Reid's wider "by reason of something else" test from Laidler v Perry.
Discounting s. 447, which might apply, not because these shares are ERS, but because the donees' existing shares are ERS, the only Chapter of Part 7 that seems to me to bite is Chapter 3C (securities acquired for less than market value).
Chapter 3C simply treats the amount by which the shares were acquired below market value effectively as a beneficial loan, and there's no benefit if the deemed loan is for a qualifying purpose (like acquiring shares in a close or employee-controlled company).
So where's the tax charge?
The holders of the existing shares (which are probably ERS), simply hold more ERS surely?
The transfer possibly falls within Part 7A, but is it reasonable to suppose that the purpose is to remunerate in these circumstances?
Agreed, Steve
I was concentrating on whther or not the shares are within ERS - which I believe them to be. So the charge should be limited to tax on beneficial loan unless the qualifying conditions are met.