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Transfer of shares

Transfer of shares to existing director / shareholders

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Hi all,

I wanted to check my understanding on something with you.

There's a company with two 50% shareholders, A and B (friends, not relatives) who are also the only two directors. A is going to stop working at the company, sell shares to B and resign as director.

A believes their 50% of shares to be worth £5000, and therefore wants to sell the shares at that amount to B, which B accepts. They have confirmed that this is the same value for which they would sell these shares to a third party.

I believe that A and B are not connected persons, but in any case, the transfer is taxed on an arm's length basis. Am I correct on that point?

In this case, because A believes the shares to be worth £5k, this is at arms length value, and it would be up to HMRC to challenge the valuation if they saw fit.

Am I missing anything here?

Thanks

Oliver

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09th Jul 2019 09:58

You are possibly confusing two expressions.
"A bargain made at arm's length" appears in s17 TCGA. You might want to read CG14542 to understand HMRC's view of what that expression means.
"Market value" is a defined term. The definition is in s272 of said Act. (Also look at s273.)

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By 356B
09th Jul 2019 11:08

It's irrelevant. The M.V. and sale price are the same, so no adjustment would be made anyway.

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to 356B
09th Jul 2019 11:22

I'm astonished that you've been able to establish what the market value is from the little information provided!

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By 356B
to Wilson Philips
09th Jul 2019 12:03

M.V. is the price agreed between a willing buyer and a willing seller. The OP has stated that both parties are in agreement, so that's MV.

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to 356B
09th Jul 2019 12:16

No, "market value" is the price that might reasonably be expected to be fetched on a sale in the open market.

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By 356B
to Tax Dragon
09th Jul 2019 12:25

That's assuming no restrictions in M&A.

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to 356B
09th Jul 2019 12:59

If there is such an assumption, it's statutory. Haven't you looked at s272 yet?

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to 356B
09th Jul 2019 11:27

I stand corrected. The OP was not conflating the two terms; you are.

A third party purchaser would hold only 50%. The actual purchaser will end up with 100%. 100% is likely worth more than twice 50%. Is that relevant?

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to Tax Dragon
09th Jul 2019 11:53

I would say that it is not relevant - not directly so at least.

If one needs to consider the market value then one needs to consider a hypothetical purchaser and hypothetical seller of 50% of the company's shares.

In this case, assuming that A has accepted that £5k is the best price that he can get and B is willing to part with only £5k, I'd say that is a bargain at arm's length. Since A and B are not connected there is no need to consider market value. But it is an assumption, that might need to be challenged.

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to Wilson Philips
09th Jul 2019 12:09

I see what you are doing... you are distinguishing between "arm's length" and "market value".

I agree what you say. (If MV was in point, the other shareholder would be considered a special purchaser, but if £5k was as far as she would go, her existence might not be relevant... which somehow seems a bit ironic!)

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to Tax Dragon
09th Jul 2019 12:34

The special purchaser point is often misunderstood. Let's say that I, the hypothetical outside purchaser with no current shareholding, is prepared to pay £5k and not a penny more for 50%. You, as a hypothetical special purchaser already holding 50%, will probably be willing to pay more than £5k to end up with 100%. Assuming that the hypothetical seller will simply sell to the highest bidder, what would you need to offer to secure the shares?

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to Wilson Philips
09th Jul 2019 12:44

Are you asking me for my best and final offer?

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to Tax Dragon
09th Jul 2019 12:56

No. It's all hypothetical, remember. If the next best offer is £5,000 then you, as special purchaser, need to offer only £5,000.01 to secure the shares.

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to Wilson Philips
09th Jul 2019 13:16

Does Hypothetical Bob have any part to play?

Bob knows that I'd actually be willing to pay £5,500, so he comes in with an offer of £5,250, thinking he might sell it on to me afterwards.

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to Tax Dragon
09th Jul 2019 13:36

It will depend on the exact circumstances. But the existence of a special purchaser is likely to influence the market value only if other purchasers are aware of the special purchaser's existence AND that purchaser has actually made an offer for the shares. Otherwise, for tax purposes the presumption is that the shares will be sold for a single bid over the otherwise open market value. This is because the hypothetical sale includes everyone and excludes no-one, and there is no guarantee that the special purchaser will actually be the purchaser. There is case law on this.

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to Wilson Philips
09th Jul 2019 13:46

We have been told in the OP both that there is a special purchaser AND that s/he has made an offer.

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to Tax Dragon
09th Jul 2019 13:58

But, that is an actual bargain at, it would appear, arm's length. There is therefore no need to consider what the market value might actually be.

Also, it appears that the departing shareholder is the one that has made the offer, to sell, which offer has been accepted by the other (who may well be getting a bargain if £5k in any way resembles the market value of a 50% holding).

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to Wilson Philips
09th Jul 2019 14:25

Sorry yes… I found the (hypothetical) discussion about the MV more interesting than the question asked about "arm's length". (To be fair, I thought I had answered that question in one post.)

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By ocooper
to Wilson Philips
09th Jul 2019 13:53

Are they not connected persons according to one another according to TCGA92/S286 (7), or does it not apply because A would no longer be exercising control of the company? Is it therefore important that they resign as director before the share transaction?

"Any 2 or more persons acting together to secure or exercise control of a company shall be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure or exercise control of the company."

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to ocooper
09th Jul 2019 14:03

I don't believe so. That provision operates to treat individuals as connected only in relation to transactions with the company (at least that is how HMRC view it - see CG14623).

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09th Jul 2019 11:30

Are you a professional adviser to the company? If so, what do you believe the shares are worth? Can you justify that valuation?

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09th Jul 2019 13:30

Are we getting too bogged down in technical detain. Assuming the amounts quoted in the OP are real and not illustrative, surely the transaction is below the radar for HMRC?

Will the value A receives affect any tax due? - for example if A wants to claim any reliefs or has other chargeable gains.

Likewise for B.

Maybe the OP could clarify the amounts involved?

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09th Jul 2019 15:22

One last point: whereas TCGA has the arm's length test before you worry about MV, there is no such test in ITEPA s446Q - it just goes straight in with asking whether the acquisition was at less than MV.

It might not matter here, since the shares come from an individual; it could catch you out in other circs.

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to Tax Dragon
09th Jul 2019 15:46

I assume that you're thinking of the "friends and family" exclusion? Otherwise, the fact that the transferor is an individual is of no relevance.

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to Wilson Philips
09th Jul 2019 16:05

Yes. Agreed.

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