Hi, wondering if anyone could help. Client who has 100% control of a company is wanting to give half of his shares to an employee. Apparently this is a relatively new employee who is going to bring a significant number of contracts!! Presently the company's value is relatively small to the extent that an estimate of the MV of 50% of shares would be circa £5k. If the client simply transfers 50% of his shares to the employee at nil value now, I unserstand the following tax implications would arise -
1) Potential capital gain as nil cost but essentially would be covered by the annual allowance.
2) BIK on the employee based on MV (£5k)
Are there any additional tax implications I am missing. I am aware of share option schemes etc. but the client does not want to persue these.
Thanks for any help.
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They are employment related securities, you don’t need to set up a scheme to fall under the rules.
So you would need to look at the ERS rules rather than the benefits rules.
I would suggest that you would need to look at both. Shares acquired by reason of employment are generally taxed under s62.
Thanks Tax Dragon, I'm probably missing something here but would I need to worry about S431 if there are no restrictions to the shares ?
Most advisers recommend a s431 election as a precaution.
Strictly speaking, you cannot make the election if there are no restrictions, because an election is only in point if the shares are restricted, which in turn is defined as having a reduced value as a result of retrictions. So even if there are restrictions if these have no effect on value they are not restricted shares for the purposes of the legislation and so an election is not in point. So, by making the election, you are admitting that there is a reduction in value and therefore a potential tax charge.
That's the theory. The practical approach is to make the protective election and if anyone asks you say that there are general restrictions in the Articles which do have an effect on the value but less than 1p per share.
If there're genuinely no restrictions, the election would be invalid. What's the harm in that? It's not like you're breaching the terms of a contract, for example.
I'd do it anyway, personally. (You'll nearly always find there is a restriction. There's surely a shareholder agreement for example? By definition, that imposes restrictions.)
@ millertime (OP).
May I respectfully suggest that the TAX implications should NOT be the FIRST considerations requiring your thoughts (even if the client has only mentioned such considerations to you).
Of more importance, in my submission, are legal and commercial aspects, and hence I would be:-
(1) Discussing, with the client, OTHER means of rewarding he employee (at least in the short term),
(2) Discussing, with the client, what would be the adverse effects if the employee’s assurances of obtaining (hopefully profitable) contracts, turned to dust (whether before or especially after he had gifted such a relatively large proportion of the company’s equity, and potential part-control, to the employee); and how to avoid losses from such "dust",
(3) Strongly advising his taking advice from a company lawyer re the significance (and potential serious adverse consequences) of relinquishing 50% of the company (such advice would include the respective consequences of 50%/50%; 51%/49%; 75%/25%; 90%/10% share splits) if the client still believes it necessary/advisable to relinquish part of the share capital and control.
RE-EVALUATION of proposals, and PRIORITISATION of future plans, are key factors in management decisions - always take a 5/10 year view in such cases.
Basil.