Paying tax on company shares?

littlereddevil

My husband's boss has offered him 10% free shares in the company and he is going to buy another 10%.
someone has told him he will have to pay a lot of tax on the free shares. Is this correct?

xylophone

An employee share scheme? http://www.hmrc.gov.uk/working/bens-shares-tips/shareschemes.htm

agrinnall

Unless it is a genuine employee share scheme (which sounds unlikely for such a large proportion of the company) then yes, he will have to pay tax on the free shares. If they are worth a lot (tens of thousands of pounds) then it's almost certainly worth seeking professional advice to try to minimise the amount of tax that has to be paid.

littlereddevil

Thanks they would be worth around £30,000. Someone has told him he could pay £20,000 in tax for them??

John_Pierpoint

Presumably this is a private company ? If so who owns it at the moment (I think I am right in saying that 2+ people do). Where are the shares coming from, ie who is getting the money ?

littlereddevil

The company was owned by 2 partners. One has retired and the other has bought him out. My OH has worked for them for many years and has been offered 10% free shares and he will buy another 10%. It is currently worth around £300,00. There are other branches in Germany and Houston but they are separate so we are talking about the Uk company only.

PaulCooper

The valuation of a private company is extremely subjective, albeit there has been a recent transaction (I assume the partners were 50/50) of 50% of the shares which had a value, this is most definately not the same value for a minority share holding i.e. 20%.
I've had some involvement with a slightly larger private company and ending up over time owning 6%. I would strongly suggest that you seek professional advice as you will be amazed what the Revenue will accept in the way of valuations of businesses and their corresponding share prices (low). Just thinking allowed, you would probably be better off buying the 20% stake for the same price as you are being offered the 10%, then there shouldn't be any tax liability.
You might also think about tax relief on the interest of a loan that you use to purchase the shares (existing mortgage)
Paul

John_Pierpoint

You have to be very careful about being the junior partner as the guy with the majority tends to act as though he owned 100%.
Understand the business, its prospects and most importantly the way it relates to the foreign partners (subsidiaries ?)
My father bequeathed us a 20% interest in an English company, the majority shareholder was the grandson of the founder and also the managing director.
The shares had originally been redeemable preference shares - but became ordinary shares when the MD failed to redeem them. The MD had the money, in that one of the subsidiaries had been enjoying something of a boom, but he chose to keep it in the subsidiary and went ahead with grandiose ideas of his own.
The legal advice that I got was that I could not force the money out of the subsidiary; though I had managed to force an extraordinary general meeting over the issue.
I cut a private deal to sell the shares to the MD for 50% of their nominal value.

Some 10 years later, the whole operation (by now in a bit of a cash crisis) was sold for 75% of its notional value, still not paying dividends [plus a nice pension for the ex MD] - tread with care.

PaulCooper

Just a thought, picking up on John P's post, what you also need if you do go for the 20% is a 'shareholders agreement' that relates to dividend policy, we had an agreement that cash flow & banking restrictions permiting, it was the company's policy to pay out a minimum of 30% of the post tax profits as diviidends pa.
It wasn't legally binding, but at least you've got it in writting that this is the intention.
Years ago when the company was small & I wasn't a shareholder, I had a written agreement that the 50/50 shareholders (that were), wouldn't increase their drawings or pensions contributions, hence minimising profits (as I was paid a profit share)
Paul

Dead_keen

This can get complex quickly. But it is my favourite bit of tax...

Yes, he will have to pay tax on the "cheapness". It sounds like this will be due via self-assessment rather than PAYE/NIC (if you want to check this, google "readily convertible assets" on HMRC's website). So, if the shares are worth £30,000 per 10% then that's taxed at 20%/40%/45% depending on his marginal tax rate, and it will be due by 31 January 2015 if he gets the shares soon.

If it is a straightforward acquisition like you describe then you will not be able to agree a valuation with HMRC beforehand (and so you won't know how much tax is due before the shares are bought). If the amount of tax due is important, you could do a two stage purchase (i) grant an EMI share option (ii) exercise it immediately after grant. HMRC will agree a value before the grant of an EMI option so that you get certainty.

Valuation is tricky. If you buy 10% for £30k and get the other 10% free then it suggests that the shares are worth at least £30k per 10%. So, as PaulCooper suggests, it would normally be better to buy 20% for the £30k. There are lots of arguments why the tax valuation can be substantially discounted compared with a 50% sale. If the company really is worth £300,000 then it might seem that a 20% stake is worth £60,000 but I would expect that you could probably agree a value with HMRC of between £15,000 and £30,000 (although if he pays £30,000 then that will be the minimum value). If big dividends are paid each year then the shares could be worth much more. Obviously, this £300,000 value may be completely wrong.

If they are brand new shares then he can get tax relief on the interest paid on a loan to buy the shares. It must be a proper loan and not an overdraft. Interest relief is not available on secondhand shares.

If the shares come from the current shareholder, don't under any circumstances get a loan from that shareholder or agree to pay the shareholder on deferred payment terms. There is a penal tax charge on this - he will have to pay PAYE/NIC on the amount of the loan, with no refund when the loan is repaid.

If the shares are already owned by someone, stamp duty at 0.5% will be due on the purchase price (not the value) and its traditionally paid by the purchaser. If they are newly issued, there is not any stamp duty.

It sounds like the company should get a corporate tax deduction for the amount of the cheapness.

If there are restrictions on the shares (e.g. he has to sell them back for cost if he leaves employment) then it would be worth making a s431 election (have a look on HMRC's website).

If they are second hand shares then the selling shareholder will have to pay capital gains tax based on the deemed value of the shares, not the actual consideration. This is important from the perspective of the 10% free shares. If the valuation makes this important, the option route I described above is better as the deemed market value rule doesn't apply.

If you can wait to September to get the shares then (if the 10% free shares are brand new shares, not second hand shares) he could become an "employee shareholder". This means he gives up certain employment law rights but means that no income tax is due on the first £2,000 of shares and no capital gains tax is due on sale (the rate would be 10% otherwise - assuming that he eventually sells the shares in more than a year's time). This will cost a bit in legal fees and so I wouldn't bother with this unless you think that the shares are going to go up hugely in value.

The company will need to report the acquisition of the shares on Form 42 by July next year.

It's not just tax though. Should there be a shareholders agreement (e.g. what happens if someone leaves, what dividends are expected, what veto rights does a 20% shareholder have - 25% is Company Law threshold and so he may have very few rights otherwise, etc)?

It can all get quite complicated quite quickly and so it is worth having a chat with someone who knows about this sort of thing.

zygurat789

How many times have we seen here "There is no gifts tax in this country" " There is no tax on gifts"?