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Transferring Shares

Transferring Shares

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If a 80% majority shareholder wants to give the 20% shareholder some shares for nil consideration, what are the implications?

As shareholders are they deemed to be connected, and therefore a gift relief claim is required?

If such a claim removes ay CGT issues, is there a BIK issue for the 20% shareholder?

Please note the 20% shareholder previously bought his shares for £100k.

Are there any other options?

The two parties are not related.

On a separate note, are Step Son &step Dad connected for CGT purposes (this Q is not connected to the above Q)

Replies (15)

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By johngroganjga
22nd Jan 2015 09:23

Yes the recipient will pay income tax on the value of the shares gifted.  The company will obtain a corresponding CT deduction.

If the company is a a trading company gift holdover relief should be available.

It would help if you would expand on your separate question.  What CGT difference does it make in your particular case whether a step father and step son are connected? 

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By BananaMan
22nd Jan 2015 09:28

But what if the 80% shareholder is transferring a % of his own holding to the recipient?

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By johngroganjga
22nd Jan 2015 09:34

Assuming

BananaMan wrote:

But what if the 80% shareholder is transferring a % of his own holding to the recipient?

Yes that is what I was assuming the question meant.

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Nichola Ross Martin
By Nichola Ross Martin
22nd Jan 2015 09:29

Maybe some scope for mitigation

I don't know about the relationship between the two shareholders, but a gift between friends should not attract income tax s421B(3) ITEPA 2003. If you claim that you need to rather careful because the onus will be on the taxpayers to prove that the gift was as a result of friendship and not employment reward. Only one case on this as far as I can tell, that really does not help because the circumstances are different.

If its a gift you can hold over a gain s165 TCGA. On deemed disposal values check out s17 TCGA 1992: gifts tend to be at market value.

If s421B(3) does not work in your favour, the company could issue some more shares under the ES scheme to the 20% shareholder or it could started a phased buy back if the 80% shareholder is planning a gradual exit. There are different approaches depending on what the parties real intentions are going forward. You do need to watch for the anti-avoidance provisions in Part 7 ITEPA (basically the whole part is anti-avoidance which is why some of it is such a mess) if you start changing the articles and change the values of shares. A company purchase of own shares, on a commerical basis, should not I hope ever produce an income tax event for another shareholder, but you never know. Daft as it sounds there are no let out clauses for small companies

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Portia profile image
By Portia Nina Levin
22nd Jan 2015 10:11

A few points

First, step son and step father are connected. A person is connected with the spouse of a relative and a relative of a spouse.

A person's step father tend to be the spouse of that person's mother, and a person's step son tends to be a relative of their spouse.

Second, the fact that two people are co-shareholders in a company does not make them connected per se. However, if you transfer an asset to another person at less than its value, that is a bargain not at arm's length, meaning that holdover relief can be claimed under TCGA 1992, section 165, in the case of such a transfer of shares in a trading company between individuals.

Note that section 165 does not just apply to gifts. It will apply to a bargain otherwise than at arm's length where there is consideration. In such a case, there will, however, be a gain that cannot be held over to the extent of any consideration.

Third, John is hasty to suggest that there is an income tax charge on the recipient, and a tax deduction for the company. We are not told that the recipient is an employee, director or shadow director.

If the recipient is such a person, then John is, of course correct.

Finally, if that is correct, then Nichola is also a little hasty to refer to section 421B(3), when section 62 takes precedence over part 7. However, the effect of such haste is largely academic.

Nichola please can you confirm what the ES scheme is for me please?

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By johngroganjga
22nd Jan 2015 10:55

Assumption

Portia Nina Levin wrote:

Third, John is hasty to suggest that there is an income tax charge on the recipient, and a tax deduction for the company. We are not told that the recipient is an employee, director or shadow director.

Yes I assumed, but not blindly, that the recipient was an officer or employee of the company.  I was fortified in that assumption by the OP's question as to whether the parties were connected merely by virtue of being co-shareholders in the company in question, from which I assumed that there was no closer connection between them, or else the question would not have been asked.  And I was further fortified by the fact of the gift being made to an unconnected person, so that the only remaining reason for such a gift to be made was that the recipient was an employee or officer of the company, whose efforts and contribution merited such a reward.

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By ted.henderson
22nd Jan 2015 18:57

gift father to son

Where a father, having 90% of the company wishes to give that 90% to his son who owns the other 10% is that not just a simple gift for CGT holdover relief purposes on which their may be IHT issues down the road but no income tax issues (they are both directors)? It is not a reward but really an advanced inheritance in a case I am thinking of.

 

 

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Nichola Ross Martin
By Nichola Ross Martin
22nd Jan 2015 10:34

Shareholders

I have assumed that the shareholders work for the company as directors or employees. Perhaps confirmation on that point?

I can then respond accordingly.

ES - employee shareholder ERA 1996 scheme

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Portia profile image
By Portia Nina Levin
22nd Jan 2015 10:37

Ah I see

The OP also needs to confirm whether the 20% shareholder has a service contract then.

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Portia profile image
By Portia Nina Levin
22nd Jan 2015 11:01

Fortification

Duly noted John. :)

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By Jigs
22nd Jan 2015 18:26

HI all, many thanks for your comments to date. Yes I can confirm that the individual is an employee of the company.

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Nichola Ross Martin
By Nichola Ross Martin
22nd Jan 2015 19:19

See my first posting

gift of father to son - s421B(3) again, so you should not be dragged into income tax. If the shares qualify for Business assets no IHT otherwise, survive 7 years from the date of the gift

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By ted.henderson
22nd Jan 2015 20:11

Thanks very much.

I was getting a little worried.

 

 

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By Jigs
22nd Jan 2015 20:44

The question Actually related to two different transactions , one where it involved step dad and son. Am I correct in assuming that gift relief can be claimed and no charge to income tax due to their family connection.

The other scenario involved two shareholders who are not connected by family, to be honest the majority shareholder would like to reward the minority shareholder and not have to charge him. Do I still have an income tax issue here, how do you determine 'friends'?
Gift relief will also still be claimed here.

How does one claim relief for s421b (3)?

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Nichola Ross Martin
By Nichola Ross Martin
23rd Jan 2015 09:48

Income tax matters...

looking at what was the first question and now appears to be the second - the one where two shareholders are unrelated. If the minority shareholder is a director or employee (same treatment for both) this is a case of employment related securities (ERS).

If shares are transferred to the employee for free he will suffer an income tax charge on the basis that there is clear purpose of rewarding the employee, it does not matter if one shareholder makes a gift to the other, or if the company makes the share award. As described in my first posting there are various ways to skin this type of cat (please pm me if you would like to look into those in detail and we can go over the different methods and see what is suitable for your situation).

ERS are now reported online and there is a heft new tax penalty regime to boot, see http://www.rossmartin.co.uk/penalties-a-compliance/penalties-appeal

I'm out now.

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