Free share issue question (probably for Eric! :-)
Discussion
Doing some work for a company and have come up with the following problem:
An employee has been made a director and has been given a 10% shareholding (transfer of existing shares, not new issue). IR has agreed company is valued @ £50K
Is there any tax liability for any shareholder arising from this? I can see that the 2 share holders who are giving away the shares may have made a capital gain, but would be below annual allowance anyway?
Would the new shareholder have the £5K seen as a distribution and so would be taxable? Or maybe a directors Loan?
Accountant says this is a BIK for the new shareholder but I don't entirely follow.
Also would "hold-over" relief be appropiate / relevant?
TIA
An employee has been made a director and has been given a 10% shareholding (transfer of existing shares, not new issue). IR has agreed company is valued @ £50K
Is there any tax liability for any shareholder arising from this? I can see that the 2 share holders who are giving away the shares may have made a capital gain, but would be below annual allowance anyway?
Would the new shareholder have the £5K seen as a distribution and so would be taxable? Or maybe a directors Loan?
Accountant says this is a BIK for the new shareholder but I don't entirely follow.
Also would "hold-over" relief be appropiate / relevant?
TIA
I'm not 100% sure on this but the Revenue these days seem to want to assess these share "giveaways" as if they were in lieu of a salary "bonus". That is where the Benefit in Kind aspect arises. If they are indeed seen as a BIK, they would then need to be reported in the P11d and the relevant tax and NI paid over by the due dates.
There are occasions when such share issues can bypass the PAYE system but I think they need to be seen to be nothing to do with employee's "employment" as such or alternatively, they can be issued as share "options" rather than actual shares. If the option is then axercised after a specific time period, the whole transaction may fall outside PAYE and BIK rules. I think the options can only be exercised after three years of their granting to the employee, otherwise they will also attract PAYE and NI.
Finally, for share options to work, they must be issued under an Approved Scheme.
The whole area of Employee/Director Share Schemes and Share Option Schemes has been tightened up severely by Gordon Brown under his draconian Anti-Avoidance measures of recent years.
There are occasions when such share issues can bypass the PAYE system but I think they need to be seen to be nothing to do with employee's "employment" as such or alternatively, they can be issued as share "options" rather than actual shares. If the option is then axercised after a specific time period, the whole transaction may fall outside PAYE and BIK rules. I think the options can only be exercised after three years of their granting to the employee, otherwise they will also attract PAYE and NI.
Finally, for share options to work, they must be issued under an Approved Scheme.
The whole area of Employee/Director Share Schemes and Share Option Schemes has been tightened up severely by Gordon Brown under his draconian Anti-Avoidance measures of recent years.
Would the new director ever repay the loan?
Don't forget, full disclosure of loans (amount, period, repayment terms, interest etc) to directors are required to be disclosed in the company's annual accounts. If the loan is showing no sign of being repaid, the company will also have to pay additional Corporation Tax under Section 419.
If it WAS a genuine £5,000 loan (which really was being repaid) you might be off the hook for the BIK on the "free interest". There is a de minimus "£5,000" level for BIKs on Interest Free Loans.
>> Edited by Eric Mc on Wednesday 8th March 16:28
Don't forget, full disclosure of loans (amount, period, repayment terms, interest etc) to directors are required to be disclosed in the company's annual accounts. If the loan is showing no sign of being repaid, the company will also have to pay additional Corporation Tax under Section 419.
If it WAS a genuine £5,000 loan (which really was being repaid) you might be off the hook for the BIK on the "free interest". There is a de minimus "£5,000" level for BIKs on Interest Free Loans.
>> Edited by Eric Mc on Wednesday 8th March 16:28
We went through this about four years ago - so things may have changed. After substantial research we concluded that there was bugger all way to give away shares! 
The only approved mechanisms, as Eric mentioned, are very restrictive - and more worrying (at the time anyway) need to be made available to all staff.
Stitched!
A possible route to reducing his exposure may be to value his shareholding as a minority holding - we managed to get a 50% downlift in value as the shareholding transfer was only 20%
The only approved mechanisms, as Eric mentioned, are very restrictive - and more worrying (at the time anyway) need to be made available to all staff.
Stitched!
A possible route to reducing his exposure may be to value his shareholding as a minority holding - we managed to get a 50% downlift in value as the shareholding transfer was only 20%
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