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Taxation on Preference Share

Taxation on Preference Share

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I am investing in a startup where we have an existing founder,who was the sole director and shareholder, and now will have another shareholder (minority shareholder, me)

We have agreed that the founder will still run the business mainly and will devote full time into teh business and wants to take out some form of funds to fund his living to the tune of £50,000

He can draw a salary of £50,000 however, dividend is more tax efficient from NI etc point of view.  However, dividends would mean that a part of the dividend need to be distributed to me as well (as will own around 20%) which is not what we want.

Apart from ordinary shares (80% to him, 20% to me) is it possible to issue him non-voting preference shares such that dividend to the tune of £50,000 are paid to him? This will ensure only he gets this distribution, and it is capped at £50,000 if profits are made that is, and helps lower the tax burden from the distribution (vs if he took as salary). Are dividends on preference shares taxed in same way as ordinary shares?

 

 

 

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13th Jul 2019 18:02

Yes, in answer to your questions, you do need an accountant.

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to Accountant A
14th Jul 2019 07:53

And a lawyer to draft the documents setting out the share rights.

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to johngroganjga
15th Jul 2019 09:46

johngroganjga wrote:

And a lawyer to draft the documents setting out the share rights.

Probably rather more than the share rights. How is the OP going to get a return on the investment? Or a return [i]of[/i] the investment. The amount invested isn't mentioned, but 20% is a large stake without having any (formal) control or influence.

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to paul.benny
15th Jul 2019 09:58

My presumption was (and remains) that the investment isn't the only connection with the founder shareholder. No arm's length investor would sign up on these terms.

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to Tax Dragon
15th Jul 2019 10:38

Agree. And that's why failing to set out key terms of the investment is a risk. Friendship or family ties can soon sour when there are disagreements about money and one feels they are being treated unfairly.

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to paul.benny
15th Jul 2019 11:06

Yes but that’s a matter for the shareholders, not the company. What the company needs to do is set out the terms that subsist between it and the holders of the new class of shares.

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to johngroganjga
15th Jul 2019 11:15

The OP is one of the shareholders, not the company... so shouldn't the OP seek (legal and other) advice pertinent to the OP?

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to Tax Dragon
15th Jul 2019 11:29

Yes very probably. That would be good advice, but not what the OP asked.

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13th Jul 2019 19:18

Will your startup have £50,000 of post tax profits to pay a dividend out of?

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14th Jul 2019 08:57

Yes it will have profits of 50,000. However it's a R&D focused business so we will try to reduce taxable profits by using R&D tax break.

The revenue Erik likely by 120k and cost likely be 60k (contractors for the research), making accounting profit 60k. But upon application of R&D tax break, the taxable profit will be zero (as cost 60k is multiplied by 230%)

this brings me to the second question which is can dividends be paid if there is an accounting profit but not taxable profit?

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to dowjones123
14th Jul 2019 09:21

If you think that the tax deduction will be £60k x 230% you really should take professional advice.

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to Wilson Philips
14th Jul 2019 11:02

Good advice.

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to dowjones123
14th Jul 2019 11:38

dowjones123 wrote:

this brings me to the second question which is can dividends be paid if there is an accounting profit but not taxable profit?

Only accounting profit (after tax) is relevant to what profits can be distributed. Taxable profit is irrelevant.

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