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Capital gains on shares of limited company

How to calculate the net gain on shares in a limited company

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Hi everyone,

Probably a really basic question but here goes.

If 3 shareholders sets up a limited company with a 1/3 each. With the shares being a nominal value say a £1.

They subsequently introduce £10 k cash into the business each after the shares were issued.

if one shareholder then wanted to sell their shares assuming no profits have been made. the shares would be valued at £10k because that's a third of the net assets.

Does that mean they would crystallise a CGT charge on £10k, because there shares at cost was just the original £1 they paid. Or can the £10k subsequently introduced be netted off against their gain?

 

Again sorry if this is really basic. Any help much appreciated.

Thanks

 

 

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By David Ex
13th May 2022 19:55

Chaz9462 wrote:

Or can the £10k subsequently introduced be netted off against their gain?

 

Unlikely assuming “introduced” means “lent”.

Depends on a lot of other assumptions too. I’d say more but I’m in the pub.

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By DKB-Sheffield
13th May 2022 20:17

If there was no trade, the shares were purchased for £1 and the net assets were £30,003 either...

1. As David says, the £10,000 introduced by each member were loans (i.e. a simple repayment - not a distribution). There would be no capital gain.

Or

2. The £30,003 was equity of some form (additional shares, restructuring, conversion, share premium, capital contribution etc.) and hence the distribution would not give rise to a capital gain either.

I am of course assuming there is no elaborate (shady) scheme at play where shareholders have raised income (to themselves) in the hope that they may show retained profits?! If that is the case, and besides being shady, they may now have the problem of - not only CGT - but also an MVL as retained profits would exceed £25K.

I assume this is purely theoretical and a learning-based question?

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Replying to DKB-Sheffield:
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By Chaz9462
13th May 2022 20:49

Thanks - It sounds like your option 2 is what I was after. I was on my phone before but now I'm on my laptop I'll give more info.

Scenario is as follows (its a property investment company):

1. They incorporated at £1 a share each

2. Two months later they introduced an extra £10k each which was credited to share capital not a loan:
Dr Cash
Cr Share capital

3. They used that £30k as a deposit on a property, with the rest being financed by a mortgage provider. Given very little time has passed (and excluding any costs) the net asset value of the company is still pretty much the £30,003 as the property hasn't had time to increase or decrease in value and the profits from rent at this point is negligible.

4. Shareholder A then decides he no longer wants to be a property investor so wants to sell his shares (buyer doesn't matter, it could be to the existing or a new shareholder).

If shareholder A sells his shares is his capital gain taxable at £10k or does his £10k contribution of cash (treated as share capital) count towards the cost of the shares?

Thanks

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Replying to Chaz9462:
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By David Ex
13th May 2022 23:03

Chaz9462 wrote:

… they introduced an extra £10k each which was credited to share capital not a loan

treated as share capital

You’d benefit from a discussion with an accountant. You can “treat” something as something but the facts are what matters. Have your tax and accounting arrangements been DIY all along?

Do you have a shareholder agreement?

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Replying to David Ex:
RLI
By lionofludesch
14th May 2022 00:01

David Ex wrote:

Chaz9462 wrote:

… they introduced an extra £10k each which was credited to share capital not a loan

treated as share capital

You’d benefit from a discussion with an accountant. You can “treat” something as something but the facts are what matters. Have your tax and accounting arrangements been DIY all along?

Do you have a shareholder agreement?

I'd echo that. It's almost as if the shareholders had no idea what they were doing.

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Replying to Chaz9462:
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By DKB-Sheffield
14th May 2022 00:36

Sorry Chaz

I had assumed this was either a hypothetical or study question. It is, however, clearly neither. Nothing is usually what it seems on here!

From your additional information, it would seem that the £30K was not a loan, but unless you have missed out a very salient point, it sounds like it is not Share Capital either.

Leaving CGT and CA2006 (etc.) aside (not that you should, just that it is a much bigger discussion point), you/ your client/ the members should take advice from an accountant and must take informed legal advice. Amongst a whole host of other things, the loan to the company is possibly (likely) at risk here (in the absence of further specific representation).

I'm afraid this forum is unlikely to help you without knowing much more information! I am therefore sorry but, I'm out.

FWIW though, and based purely on the information provided in you OP (and @ 20:49), I do not believe there is a £10K Capital Gain. However, I also strongly suspect the Capital Gain/ Loss is not £Nil either.

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Replying to DKB-Sheffield:
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By More unearned luck
14th May 2022 14:10

"From your additional information, it would seem that the £30K was not a loan, but unless you have missed out a very salient point, it sounds like it is not Share Capital either."

Your third possibility sounds like it might be a gift which brings to mind this thread:

https://www.accountingweb.co.uk/any-answers/bonkers-cgt-judgment

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By Latecomercamefirst
13th May 2022 20:28

Who is buying the shares?

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Replying to Latecomercamefirst:
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By lionofludesch
14th May 2022 08:16

Latecomercamefirst wrote:

Who is buying the shares?

What is the consideration?

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By More unearned luck
14th May 2022 14:20

Follow the advice already given and appoint an accountant.

But, the share in question is, like every thing in this world, is worth precisely what someone else is willing to pay for it. An outsider might offer less than the net asset value as he/she is buying a minority interest or more in the hope of future growth. One of the other shareholders might offer more as he/she will gain control. If both the other shareholders enter into a bidding war then the the sky's the limit.

Check the articles for pre-emption rights.

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By More unearned luck
14th May 2022 14:22

Follow the advice already given and appoint an accountant.

But, the share in question is, like every thing in this world, is worth precisely what someone else is willing to pay for it. An outsider might offer less than the net asset value as he/she is buying a minority interest or more in the hope of future growth. One of the other shareholders might offer more as he/she will gain control. If both the other shareholders enter into a bidding war then the the sky's the limit.

Check the articles for pre-emption rights.

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