Share Issue

Share Issue

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A client who is the sole shareholder and director wishes to issue a further 100 shares divided equally between her four children who will not be employed (two might be directors at a later date.)   The she has lent the company £350,000. It has invested £100,000 in a flat which is let.   The company also bought a house for £200,000 and has spent £50,000 renovating it. It was purchased for resale and is on the market for £350,000, so a potential £100,000 profit.   It has been let for six months temoprarily. In the first year the company  lost £8,000 after interest accrued on a loan from the director, which has not yet been paid.

So, on the face of it the company has a deficit of £8,000. If we issue shares in equal part to the four children  at say 25 shares for £10 per share. So a capital injection of £1,000. On the face of it there are no tax implication for the share issue. But, what when the house is sold three months down the line at a £100,000 profit?

The intention is that the profit of the sale will be reinvested in this (second year of trading) financial year in a new project.

Replies (7)

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By johngroganjga
25th Jan 2014 12:55

I am not sure that you can turn a blind eye to the true value of the property and say that "on the face of it" the shares have no value.

I would have thought that the value of the shares issued minus the issue proceeds would be taxed on the director as earnings. 

 

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By JFW99
25th Jan 2014 14:42

Thanks. I had not considered that.  I was concerned that even though the company is now in deficit after the accrued interest the fact that the house was now on the market, though no offer yet received, might affect the valuation of the assets It is likely to be sold in the next few months.  Taking the house value into account the company has net assets of £90,000 to £100,000. 

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By Marion Hayes
25th Jan 2014 15:38

Current shareholding?

What percentge of shares would the additional 100 represent?

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By JFW99
25th Jan 2014 16:21

An increase from 100 to 200 ordinary shares.

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By Marion Hayes
25th Jan 2014 16:33

CGT vs Salary

John's point is good - I would be more inclined to sub-divide the shares and then personally gift a proportion to the chiildren who I assume are over 18.

The gifts would be at market value so you need a professional opinion on the value of the company as soon as possible. Once you actually receive offers on the property any uncertainty as to the value of the assets disappears.

If this is a trading company then gifts of shares can be held over from a gain point of view. If not smaller tranches may be better over time.

 

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By JFW99
25th Jan 2014 18:39

The shame is that I advised dealing with this issue a year ago only to have the client reject it as an option till last week when the house's sale is looming.  I have lost count of the number of time I have said.  "Once you get an offer on the house your options have vanished." 

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By blok
25th Jan 2014 18:40

.

The OMV of the shares are likely to be more than the balance sheet value, which wont include the uplift for the stock.

CGT:  The transfer will then produce a gain to the parent whih, if it can be established that the company is trading, then the gain may be held over.  I believe that HMRC may provide an opinion to the company on whether they believe it is trading.  The usual 80:20 tests will be in point.  If doubtful, the transfer could be made over more than one tax year tospread the cost (if gift relief wasn't available).

Income Tax:  Employment Related Securities legislation is mentioned above, but surely the exemption for immediate family share transfers will defeat this.

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