Father & son directors & shareholding

ERS issue or not?

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A bookkeeper colleague has passed me a job (year-end & CT etc).  Company (haulage business) incorporated in Nov 2017 and trading commenced Nov 2017 with just one director/shareholder (father) who drives the company's sole HGV.

In July 2018, director's son joined the company as a second director and the company acquired a second HGV which the son drives.

We have now been handed this job and have prepared accounts.  Bookkeeper told me that he thinks the shareholding is 50/50.  I have checked and I see that the son is a director only.  As both father and son want to own equal shares, I have been asked to make them equal shareholders, so both can take dividends.  

I am thinking that if the company issues another £1 share, that this will be an employment related security and therefore tax on the undervalue will be due.  I am aware of the family exemption, but as far as I am aware, this would still be considered an ERS.  Do you agree?

The value of the shares cannot be much, but first year profits were 12K after minimal director's remuneration (10K between them) and net assets are 12K including cash at bank of 15K, so presumably they are worth something.

Would you say the shares are given by reason of family relations or by reason of employment?

TIA

Replies (13)

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By Adam12345
10th Apr 2019 16:44
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By Adam12345
10th Apr 2019 16:46

duplicate

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Psycho
By Wilson Philips
10th Apr 2019 16:49

If the company issues a share to the son, the 'family' exemption cannot apply.

The solution is to redesignate the existing share as, for example, 100 1p shares and the father then transfers 50 to son.

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By Matrix
10th Apr 2019 19:18

Per above transfer shares instead of issuing new shares, you may as well get inside the family exemption so no ERS scheme to register.

I assume you will have to value the shares for the disposal by the father and consider gift relief depending on where you come out (the value of the shares transferred may be below the annual exemption though).

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By Manchester_man
10th Apr 2019 22:10

Ah, ok thank you all. I'm glad I asked, as I had interpreted the guidance wrongly; I thought that the exemption also applied to new shares issued by a company 'owned by a family member'.

I thought that the family exemption was there principally to allow for companies to be handed down through generations, so my concern was that 'being a director' would override the family exemption.

I agree then that it is better for the father to transfer some shares to the son and claim hold over relief if necessary.

Thanks very much.

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Replying to Manchester_man:
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By Tax Dragon
10th Apr 2019 22:23

Manchester_man wrote:

Ah, ok thank you all. I'm glad I asked, as I had interpreted the guidance wrongly; I thought that the exemption also applied to new shares issued by a company 'owned by a family member'.

I am sure I have seen HMRC guidance that says exactly that.

If I spot it again (and remember so to do) I'll post a link.

Edit: assuming I'm not time barred.

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Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
11th Apr 2019 12:04

You are correct. It used to be in ERSM20220: https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/e...

The guidance was however updated to remove it - in 2012 according to this link: https://www.pettfranklin.com/news/hmrc-employmentrelated-securities-manu...

Given the legislation makes no mention of being able to come from a company, I'd say the safe option is to split the fathers shares and then gift half to his son.

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Replying to Lone_Wolf:
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By Tax Dragon
11th Apr 2019 12:19

Thanks Wolf.

Looks like they still haven't updated ERSM140070 which I think might be where I read it last year.

But I agree - I would not be relying on that, other than possibly in extremis and retrospectively, certainly not in the OP's situation.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
11th Apr 2019 15:11

I find the wording in ERSM140070 quite ambiguous. It could indeed refer to the issue of shares in a company controlled by a family member. Or it could refer to a transfer of shares in the employer company, which shares are already held by another company controlled by that family member. It does repeatedly refer to 'transfer' - that might be loose wording to describe any acquisition, or it might actually mean transfer, which would again rule out a share issue.

However, I don't really see what the mischief is. Father transfers 50 of his 100 shares to son, or arranges for company to issue 100 new shares to son. Other than the number of shares, the outcome is identical.

But since HMRC considered the previous guidance to have been inaccurate, the safest option is as suggested - redesignate and transfer existing shares.

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Replying to Manchester_man:
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By Matrix
11th Apr 2019 06:07

ERS rules apply to both shares issued and shares transferred so I expect the personal relationship exemption applies to both. However I would probably only use it for a share transfer.

If you issued the new share would this be at nominal value?

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Replying to Matrix:
Psycho
By Wilson Philips
11th Apr 2019 09:10

Section 421B of ITEPA 2003 says

"the person by whom the right or opportunity is made available is an individual"

I suppose that in the case of a sole director/shareholder who directs that the company issues shares to a relative one might argue that the right has been made available by that individual. However, all courses and commentary that I have seen indicate that the shares must be acquired from an individual. It is not, therefore, an argument that I would want to rely on.

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By CJaneH
11th Apr 2019 10:44

Has the company incorporated in Nov 2017 and owning and running two lorries accumulated so much undistributed profit that a great value attaches to the shares already issued or to be issued?

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By Tax Dragon
11th Apr 2019 15:12

This may technically be trolling, but are youse (sorry Cheshire) OK if I go slightly off-piste? As we have noted, s421B(3)(a) refers to the right being made available by an individual. Presumably that applies to transfers on death as in life. What if the shares go into trust and the trustees decide on any appointments out?

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