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Issuing new shares

Issuing new shares

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A trading company was incorporated in Feb 2007 with one share each for the husband and wife directors. The husband now has a full time job and I want to split the shareholding 75: 25 in the wifes favour so that the paying of dividends does not put the husband into higher rate tax. Looking for some guidance on how do this and any potential pitfalls. The company is doing very and could be valued at at around £200,000, if this is applicable?

Do I just complete form SH01 and file at companies house? Are there any liabilities arising on the directors?

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By pkhaynes
05th Mar 2013 16:36

Form 42 problem?

Just a quick thought to get the ball rolling......

 

Issue of shares will be at undervalue, BIK issue? and give rise to form 42 reporting. 

 

Perhaps consider subdividing the shares into 1p shares and then H gift W 50 of his shares.  As in course of family relationship no need to report on form 42.

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By YellowSticky
05th Mar 2013 16:50

Settlements legislation

You will probably need to allot further shares if there are only 2 shares in issue or go down the route of a bonus issue. You may also need A J30 stock transfer form and a company resolution to effect the transfer of shares. The statutory books would then need to be updated.

I presume the shares in question are ordinary shares with full voting rights, rights to dividend and assets on a winding up? Provided its an outright/irrevocable gift from husband to wife the transfer should be excepted from the settlements anti avoidance legislation. You might want to prepare a gift deed to effect the gift of shares. There should be no CGT and Stamp Duty consequences. I presume Husband and Wife are both UK Domiciled for IHT purposes in which case IHT isn't an issue as well.

As you are probably going to have to issue new shares, and I presume both husband and wife are directors and therefore employees of the company, tax rules concerning Employment Related Securities would also need to be considered. 

Hope this helps

 

YellowSticky

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Nichola Ross Martin
By Nichola Ross Martin
06th Mar 2013 22:39

Not employment related
as there is an exemption for transfers between family so the major potential pitfall is the settlement legislation as no CGT or IHT issues appear if this is a clean transfer.
To be frank I would rather have more information on this and look over the accounts and find out who is doing what before committing a full opinion either way.

Virtual Tax Partner support for accountants: www.rossmartin.co.uk

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By George Attazder
06th Mar 2013 23:05

That's not correct though...

...is it Nichola.  If the company issues the shares, they are employment related securities, no matter what the accounts say!

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Nichola Ross Martin
By Nichola Ross Martin
07th Mar 2013 10:11

No - I disagree, the comment by "george attazder" incorrect here

Aside from the fact that the companies can of course issue shares to founders, private equity investors, other companies etc none of which are employment related, you need to consider s421B ITEPA 2003.

Note my comment about requiring more info.

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By Sunshine Onerenidi
07th Mar 2013 11:55

Founder shares

Apologies Nichola, but HMRC's interpretation of S.421B does differ from yours. See ERSM20240.

Since the wife is already a director any new shares issued by the company (and it will need to issue some) will be ERS.

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By YellowSticky
07th Mar 2013 13:03

Issue
Valid point sunshine but we could subdivide the share capital to 20 shares at £0.10p each as we are keeping the same rights I understand

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Nichola Ross Martin
By Nichola Ross Martin
07th Mar 2013 16:55

In the context of family companies

response to "sunshine"

I made a comment about founder shares in another posting so time does not permit more. One will need to go to judicial review to discover what are the implications of HMRC issuing different guidance in different places but as there is unlikely to be any tax effect on issuing subscriber shares it is a non event, hence Form 42 guidance.

s421B(3) is the relevant part for the questioner. We have no case law on gifts to wives because HMRC tend to take the "common sense view" (their words not mine) about share transfers between spouses. See ERSM20220 for HMRC's view on that section (which is as yet untested by the courts).

As an aside -

What is quite interesting here is that if you all chose to ignore the exemption offered by s421B you will have to make your clients pay income tax on transfers of shares between spouses. Time to start to mourn the death of the family company : )

 

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By Steve Kesby
07th Mar 2013 16:00

Nichola, can I just clarify something

I know that your final point is somewhat rhetorical, because a transfer of shares between husband and wife would not give rise to a tax charge under ERS. I'd taken the dissenting repondents to mean that the exemption in S.412B(3) doesn't apply if the shares are issued by the company to the wife.

Anyway, that's not what I was trying to clarify. It's the suggestion that an issue of shares should be reported on form P11D.  I'd understood that that wasn't the case; that because shares are money's worth they're not a benefit or expense reportable on form P11D.

Obviously, form 42 would need to be filed and the recipient would need to report any taxable amount on their own SATR, but I was under the impression that it wouldn't go on form P11D. Have I got that wrong?

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By BKD
07th Mar 2013 16:18

I think it depends, Steve

If the shares are issued at undervalue, a charge to tax on earnings arises - P11Ds are not involved. If on the other hand the shares were to be issued at a discount to MV, with the balance to be paid later, then you have a reportable loan.

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Nichola Ross Martin
By Nichola Ross Martin
07th Mar 2013 16:58

Yes please do!

a share issue to an employee for no consideration where the shares are not readily convertible assets: report on Form 42 plus the Employment Income pages of the employee's SA return.

Sorry got here too late to comment but I changed that posting to "income tax" to hopefully remove confusion. If you treated the shares as nil paid instead there may be a P11D notional loan reporting issue as noted.

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By Steve Kesby
07th Mar 2013 17:36

Thanks both

That was my understanding, but I had it suggested (by a non-expert) recently that they'd been advised to P11D them and when Nichola indicated a P11D treatment, it started to worry me that it was me that was wrong.

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By YellowSticky
07th Mar 2013 18:20

There should be no P11D implications - the income tax charge is looked after by the ERS.

One option would be to issue shares at market value to work around an income tax charge to the employee and leave the unpaid amount as a beneficial loan. There may be a BIK but there are specific rules to dispense the BIK in such a scenario. That said you lose out on a CT deduction and it is totally irrelevant to the discussion in this forum!

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By YellowSticky
07th Mar 2013 18:24

Exemption
As clarified earlier - there is an exemption from reporting share transfers in a domestic relationship on a F42!

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Replying to MissAccounting:
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By BKD
07th Mar 2013 19:40

Exemption

YellowSticky wrote:
As clarified earlier - there is an exemption from reporting share transfers in a domestic relationship on a F42!

Yes - but most of the discussion (almost all of it) is about the issue of new shares

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Replying to Tornado:
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By YellowSticky
07th Mar 2013 19:43

Accepted - but there needs to be a transfer to achieve the required shareholding

 

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By Ding Dong
07th Mar 2013 19:15

am I missing something.....

Latecomer here and probably oversimplyfing

If the company allots new shares to the h+w - say 1 each, by way of bonus issue on a 1 share for every share held, there is a form 42 report rquired even though founder shares (my understanding but I am happy to bow to others)

Then if the H gifts one of his shares to his W (say) a week later -she has 3 (75%) and he has 1 (25%)

or, amend mem and arts and do special resolution etc, split each £1 ord into 100 £0.01 ords, then H tfrs as an interspousal gift 50 of his shares to W, achieving 75%/25%

Have merrily typed away my ideas and not given due consideration to all taxes, but I think that works,

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Replying to mjshort:
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By BKD
07th Mar 2013 19:42

What you are missing ...

Ding Dong wrote:

 

If the company allots new shares to the h+w - say 1 each, by way of bonus issue on a 1 share for every share held, there is a form 42 report rquired even though founder shares (my understanding but I am happy to bow to others)

... is that they will not be 'founder' shares - the OP suggests that the company has been trading for a number of years.

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Replying to Portia Nina Levin:
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By Ding Dong
07th Mar 2013 19:50

correction

my reply should have said the original 1 each were founder shares, you are right the bonus issues are absolutely not founder shares.

 

 

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Replying to mjshort:
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By YellowSticky
07th Mar 2013 19:48

It works

Ding Dong

It works - but we are all in danger of giving advice here and we've assumed that it is as simple as it sounds

We all know - the moment you study the facts of a case further - there is bound to be complications that arise! I'm sure you'll agree?

YellowSticky

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Nichola Ross Martin
By Nichola Ross Martin
08th Mar 2013 09:39

So...

issue new shares to each shareholder, file form SH01. Then transfer shares from  husband to wife. Don't complete Form 42 because you don't need to; s421B(3) provides an exemption for friends and family.

However - as the devil is in the detail and we know nothing of the company, the background, or anything else, more information would be needed before actually commenting on the application of the settlements provisions or any other matter that might be relevant to this including Part 7 ITEPA 2003.

 

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By pauld
08th Mar 2013 12:29

Further information

What other info might be required regarding background etc.

The company was a sole trade for a couple of years before incorporating.  The business, in reality, is run solely by W, with 3 part time employees.  Turnover approx 230K, profits before tax approx 60K. 

 

 

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Replying to Cheshire:
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By YellowSticky
08th Mar 2013 13:15

pauld - if you are looking for concrete advice it may be best to engage a tax specialist. This way you have a formal engagement in place and the facts of the case can be considered in detail. I am still not convinced that a discussion on a public forum is the best way forward.

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