Tax implications for share transfer between founders?

heretogetsomeadvice

Hello!

My business partner and I founded a company 10 years ago. When we started the company, we had 100 shares; 10 of those shares went to investors, and 90 remained between us. He held 50 shares with the intention of 10 of them going to an option pool, with me getting 40 (the remainder). Now, 10 years on, we never allocated those shares, and are busy setting up options via a specialised vehicle which will dilute us equally. So I am looking to transfer the original 5% of shares from him to me... however, the business currently has significant value, and I don't want to incur income tax up-front on that transfer. He is happy to do the transfer as long as he doesn't incur capital gains tax up-front either, as we are not *realising* any money (and crucially, those shares were always held for me). Can you provide any advice on what mechanisms are available to me to do this transfer, and potentially who I can/should engage to proceed?

Many thanks!

Jeremy535897

There is no way a question of this nature can be answered in a forum like this. You need to take proper advice from a share options tax expert.

Dead_keen

This is a complicated question and will depend on the actual facts.  Your numbers don't make sense (getting 5% or 40?) but anyway...

1. I will assume that the other founder has got the beneficial interest in the remaining 90 shares.  This assumption means you had no beneficial interest in those shares.  That is a crucial assumption.  If it is not correct then life is a lot easier.    If you think you do have a beneficial interest in those shares then you will need good evidence of this to be able to demonstrate it.  I've seen this situation a lot of times and it is ususally very clear that you have the beneficial interest or not. 

2. Saying "those shares were always held for me" isn't enough to say that you had beneficial ownership of those shares from the start. You can imagine a situation where it goes along the following lines "Hey heretogetsomeadvice, we need to set up this company now and as you are on holiday now I'll get all 100 shares and you can buy the 40 shares off me when you get back" or "Hey, lets subscribe for the shares 60/40 now, ah but you are on holiday now so can't sign the paperwork today, tell you what, I'll use the £40 that I owe you to buy those 40 shares on your behalf and I'll hold them as your nominee".  With the first, there is no beneficial interest.  With the second there is.  Where someone tries to argue that they do have a beneficial interest when there is no documentary evidence, I get them to ask their solicitor to help them prepare a statutory declaration and understand the consequences of perjury, it seems to end there and no statutory declaration appears.  I am aware of one tax case where someone tried to argue that their partner had a beneficial interest in shares and the tribunal basically said that they were having a laugh.  The rest continues on the assumption you have no beneficial interest.

3.  Transfering the beneficial interest to you will be a disposal for CGT purposes by the founder and he will pay CGT based on the market value of the shares (regardless of whether you pay anything).  This is a dry tax charge.  You can jointly make a s165 election to get rid of that capital gain.  You can google that.

4. The income tax treatment of you acquiring the shares depends on the terms on which you hold the shares.  Assuming you cannot be forced to sell the shares for less than they are worth (or you make a s431 election) then you will pay income tax on the market value of the shares.  This will normally be paid via self-assessment.  However, if the shares are "readily convertible assets" then the employer has an obligation to operate PAYE/NIC on its best estimate of the value of the shares.  This is the case even if it is not involved in the transfer of them to you.

5. Shares will be RCAs if they meet a complex tax definition.  In short, they will be RCAs if there is, or is likely to be, a way for you to sell shares.  They can also be RCAs if the shares are not fully paid up, redeemable or in a company under the control of another company (which may be relevant if the other 10 shares have fancy rights or your "specialised vehicle" has some fancy rights).  If PAYE is due, but you don't reimburse the company by 4 July after the end of the tax year there is a penal tax charge (more tax on tax basically).  The NIC is both employee's and employer's NIC (and also apprenticeship levy for large employers). 

6. Your employer may also get a corporation tax deduction for the value of the shares you acquire (terms and conditions apply).

7. Your employer has to report your acquisition to HMRC by 5 July after the end of the tax year.

8. Depending on facts / values / expectations / your spare cash, it might well be worth you taking the tax hit now (especially if they are not RCAs). 

9. An EMI option may be a better idea as you can defer the income tax and still get 10% CGT on future growth in value (terms and conditions apply).  Whether you can have an EMI option depends on the facts (e.g. how big the company is and what it does).   An EMI option (or any option) can help the founder as it means that the CGT deemed market value rule would not apply.

10. You mention "busy setting up options via a specialised vehicle".  That to me is a red flag.  This would be a very strange thing to do these days and can cause all sorts of problems.  You would need a really clear reason for doing that.  I can't think of a sensible one where (i) you and the founder are shareholders in the current company, and (ii) the option holders are in another company.  If you have a PE investor coming on board or managers in other countries getting share options, there might be some reasons for it but that would be an unusual fact pattern to be asking random strangers on an internet forum for tax advice. To me, this is likely to just mean more hassle and suspicion (e.g. by the people doing due diligence on an exit).  If you still want to do that, make sure that you know why and that you do it with someone who is a specialist rather than someone who thinks it is a good idea.  If they say the reason for doing it is UK tax driven then choose another tax adviser.  

heretogetsomeadvice

Thanks @Dead_keen for your informative response!