UK Allocation of shares and tax liability


sct

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Hi all

I am one of three Directors of a Limited company that has turned a profit in the last financial year and will do so again this year.

I have been promised shares for quite some time and only recently have secured a commitment to a transfer of shares from other share holders. the shares are to be 'gifted' at zero or lowest possible value.

We have received advice that suggets three routes, id appreciate it if someone in the know can sanity check this advice and give a second opinion

Issue him shares now either being fresh shares or transfers form existing Shareholders, but him effectively not paying for them (or only paying a small sum). As there is no doubt that he is getting these shares because he’s an employee, the risk is that the Revenue will tax him on the difference between the price he pays and the market value of the shares now. This would be an income tax charge to him. So, if you want to do this, it is simply doing the paperwork and issuing him with an appropriate letter explaining the tax risks

As above, but with the added step of applying, after the share issue, for a “post transaction valuation clearance”. The Revenue will not give a pre clearance for a simple share issue or transfer of shares to an employee, but if requested they will look at it afterwards and attempt to agree a valuation with you. Once the valuation is agreed, that will generate the tax that has to be paid by ME

Instead of issuing shares to ME directly, you could create an EMI scheme (Enterprise Management Incentive), under which ME would get a share option over the shares. He could exercise his option whenever he liked, but the benefit of this is that you can ask the Revenue for a valuation in advance. In addition, once you’ve told them what the Company is worth (looking at the profits and the multiples etc), you can ask for a discount of between 50-70% to reflect the fact that ME will be a minority Shareholder. Once you’ve agreed the value with the Revenue, you can issue the options to ME at whatever price you like – either at £1 a share, or at the price agreed with the Revenue or even more if you wish! But the point is that, to the extent that you issue the options at price that is less than the agreed value with the Revenue, the difference would be charged at income tax when ME exercises. But at least we all know where we are! To do this would involve a fair bit more work, because you’d need to create an Option Deed, even though it was really mainly a device in order to get a valuation from the Revenue. You’d also have to check the Articles and your share capital, there are forms to file with the Revenue, etc, etc.

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personally im not keen on the EMI but also fear a hefty tax bill.

ideally i want to have the shares transferred but at the lowest possible tax cost.

any advice n how IR would calculate the value of the shares would also help

Thanks!
 
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