Small business tax efficiency

[otolith]

Small business, limited company, half a dozen or so staff. Four key members of staff, one of whom owns the business, three of whom currently hold stock options. Considering the option of vesting the stock options, reducing salaries, paying dividends. This appears to offer considerable tax savings.

No-brainer? Minefield?

[otolith]

We'd need to get the accountant to sort out the mechanics of it, including reporting the exercising of the share options - but is it an unreasonable idea in principle?

[otolith]

It would only happen with the consent of everyone involved (I'm one of the three). We would have to be paid some sort of salary to comply with the minimum wage. I think it would be hard to convince anyone otherwise than that it was being done to minimise our personal tax liabilities, but surely that's always a difficult charge to defend when people take a token salary and dividends?

[otolith]

Interesting, Eric, thanks. The people involved effectively are the business, though I don't suppose that makes much difference.

[otolith]

Just thinking about this - at what point would the revenue cry foul - when I exercised my share options, when I reduced my salary, or when the company paid a dividend?

[otolith]

Split (if options are exercised) would be 70:10:10:10. I believe the option scheme is approved. People joined at different times, me first 7 years ago, the others over the years since. The scheme was really about the sale of the company, but although profits are healthy, sale does not look to be on the horizon. Everyone has options on ordinary shares - the biggest issue would be that the owner would probably not want to take as much as 70% of the profits - I don't know whether it would be feasible to convert some of his shares to a class which doesn't bear a dividend.

[otolith]

Just to bump this, after several years. Situation is still the same, with key members of staff having earned share options in an approved scheme and which are now more than old enough to be vested without attracting NI or income tax. What would the tax implications be of vesting these? If they aren't immediately sold (as they would be if we had sold the company) how is the capital gains liability on shares in a private company calculated? Would it be disadvantageous in the event of sale to own shares rather than options under an approved scheme? Would it be more tax efficient to use profits to pay dividends rather than giving (the same) staff bonuses? Could the majority shareholder waive some or all of his dividend?