A director of a trading company wishes to sell 5 £1 shares in his company to a fellow director. He acquired the shares at par. The shares have been valued at £10,000 but he will sell them for £5,000. My understanding is that the directors are not "Connected persons" under TCGA 1992 S286 so the consideration will be the sales proceeds & not the market value. He will make a gain of £4995, covered by the annual exemption. Am I correct? I'm pretty sure I'm missing something glaringly obvious.
Replies (10)
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No they are not connected persons, but what you are missing is the fact that the market value rule applies, even where the parties are not connected, where there is a gratuitous intention, as there clearly is here.
There are also, of course, income tax implications for the transferee and corporation tax implications for the company.
Connection
Is only one reason for application of MV. Is this a bargain at arm's length? It doesn't sound like it.
The other obvious point is that a gain of £10k would still be covered by AE (assuming it hasn't already been partly used).
The bigger issue is the fact that we are dealing with options. the interaction of which with the MV rule can be complex. To comment on John's point, though, there is not necessarily a gratuitous transfer here. If the MV of the shares was £5k at date of grant of the option there is arguably no undervalue - one would have to consider what the option was actually worth when granted.
Gratuitous transfer
I did not see the reference to options until I had written my post. I took the OP's question at face value.
Hmmm
Shares to an employee may well be treated as an arm's length bargain. But from director to director? I'm not so sure. I'm not prepared to say one way or the other - just repeat what I said above, ie it doesn't look arm's length to me.
But it does seem that MV will apply in any case. If it does, I'm not convinced that 144(2) removes the MV complications. Frankly, I can't be botheed to lookat the interaction of the ERS rules, but at the very basic level, it seems that MV is applied only to the option itself, and not the exercise.
For example, if the MV shares at the date of grant were £5k and the exercise price is £5k, the value of the option is arguably negligible. The price payable for the shares is then set by the terms of the option, not the relationship of the parties. So, subject to the MV of the option. in the OP's case I'd say that the disposal consideration is only £5k.
There is an example (3) at CG12399 that illustrates this point (the values used are remarkably familiar).
EMI Scheme
Apologies if misinterpreting but how can a Director be personally selling shares granted under a Company Options scheme?
I would have expected the Company to issue new shares which would obviously dilute the other Directors %age but is not a CGT event for him
Marion
EMI options do not have to be granted over new shares - existing shareholders' shares can be used as well.
@BKD
Really? Thanks for the information - there is always something that passes you by if you haven't actually used an aspect before isn't there!!