Employee Shares

[DanT]

Hi

A private ltd company has 5 equal shareholders. Their roles in the company are as follows:

Shareholder 1 - Director and employee, paid a salary (20 shares)
Shareholder 2 - Director, paid no salary (20 shares)
Shareholder 3 - Employee, paid a salary (20 shares)
Shareholder 4 - Employee, paid a salary (20 shares)
Shareholder 5 - Just a shareholder (20 shares)

The plan is to transfer 3 shares from shareholders 1,2,4 & 5 to share holder 3.

There will be nothing paid for the shares.

My understanding is:

1. The people transferring the shares will be liable to capital gains tax based on the market value of the shares.
2. The person receiving the shares will be liable to income tax on the market value of the shares.
3. There is no tax or NI liability for the ltd company.

My questions are:

2 of the shareholders giving the shares away are the parents of the receipient, can this be classed a gift so no tax?
How does the person receiving the shares pay the income tax? Where does it go in his tax return?
Am I missing anything?

Thanks for any advice.

D

[Tax Champion]

It is perfectly legitimate for parents to gift shares to children, and if they are gifted because of the parental relationship rather than the employment, there should be no income tax liability on the recipient.

Provided the donee agrees, hold-over relief can be claimed, which means no CGT for the donor- use the claim form on HS295. However if Entrepreneur's relief would be due (not the case for no5), this might not be the best option.

The income tax charge on the donee will only apply in any case if these are employment related securities - if they would be transferred regardless of the employment status, there is no incometax liability.

[section 44]

The income tax charge on the donee will only apply in any case if these are employment related securities - if they would be transferred regardless of the employment status, there is no incometax liability.

Practically it would be a tall order for shares not to be employment-related securities if they are shares in the employer and are being transferred to the employee.

How does the person receiving the shares pay the income tax? Where does it go in his tax return?

You need to consider the national insurance and pay as you earn implications (if any).

3. There is no tax or NI liability for the ltd company.

Your understanding may be wrong, see above.

Am I missing anything?

In addition to the above you also need to consider whether or not there are any income tax and/or national insurance implications for the transferors by reference to their acquisition and holding of the shares (i.e. you appear to have assumed that only capital gains tax would be in point for the transferors).

If these would be gifts then IHT should be considered. You should also consider any stamp duty/stamp duty reserve tax implications.

[DanT]

Thanks for your comments.

The shares are worth about £4,000 each, so I am thinking if we do it over 2 tax years there will be no capital gains tax due as the total value will be below the allowance each year.

The value of the shares that shareholder 3 will be receiving will therefore be £48,000. Does tax and NI (employees & employers) need to be paid on this as if it was wages then?

The reason for the transfer is so shareholder 3 receives more for the work he does for the company, so very much employment related.

Are the tax implications the same if the company were to buy the shares back off shareholders 1,2,4 and 5 for say £1 each instead?

Thanks again, all advice much appreciated.

D

[Incredulum]

What happens, s44, if 1,2,4 and 5 waive their dividends?