Gifted shares in a limited company

[dealerjm]

I own 100% of the shares in a limited company which I have run for 20 years and soon plan to sell. I have informally promised to 'gift' 5% of the shares to my two executive Directors when the company is sold and agreed to settle any tax due on this transaction.
Clearly I will be taking professional advice to implement this but 'pre-event' I am curious as to the most efficient way to carry out the task for all concerned, in terms of timing and the order of play.
I would add that both Directors have agreed that should the buyer require 100% of the shareholding, they would not obstruct the sale by retaining the shares and would offer up their 'gifted shares' as part of the sale.
Any thoughts?

[Lee Young]

Assuming it is a trading company then the gift can benefit from hold over relief and therefore there would be no CGT on your gift, but if and when they disposed of their shares they would pay CGT on both your gain and theirs. In other words they acquire your shares at your base cost and you pay no CGT.

[Incredulum]

I'm bemused by your proposed structure.

Either, sell 100% to buyer and give directors 5% of proceeds.

Or sell 90% to buyer and given directors 5% AT EXACTLY THE SAME TIME. Then you don't have to worry about blocking the sale to a third party etc. etc. Moreover, you never have to have them as co-owners - much as you love them.

[Incredulum]

Any income tax issues for the directors?

[dealerjm]

Thanks your replies. I've no doubt that my fellow Directors will want to cash in their shares to the same buyer of the company and I understand the 'bemused' comment as clearly giving them 5% of my proceeds is the simple and obvious solution. I just wondered whether it was to their financial advantage to have the shares in the first instance, however momentarily, before selling them on to the buyer of the company. I anticipate the value of these shares will exceed £60k per allocation and so income tax when combined with their regular earnings will be significant.

[simplytax]

If you have already promised to gift 5% to them and they are directors then in the first instance is this not a securities option under the employment related securities legislation whereby they will be deemed to be receiving shares or payment from you post sale as by virtue of employment. The company will be liable for PAYE/NIC and the employees class 1 NIC. The capital gain will be nil as the amount subject to income tax will be an allowable cost for CGT.

If they were deemed to have an option then if this were formalised such that they then exercised the option immediately prior to sale then the same PAYE/NIC consequences may ensue but the company would be able to claim a CT deduction equivalent to the income tax assessable on the employees.

This is a tricky area with pitfalls, but I think if the employees are receiving value it will be deemed by virtue of their employment even if you are transferring the shares.

If nothing had been promised upfront then you perhaps could have made a gratuituous gift of cash post sale. However the cat may be out of the bag if any due diligence and the promise has been mentioned to lawyers as they will want to document the legal position re any potential rights of employees.

[dealerjm]

I begin to realise how matters perceived to be simple can morph into complexities where tax is concerned. I am not that financially clued in and so whilst your reply seems very professional, it's a little lost on me.
What I can say is that the share deal is written into their Contracts and so 'the cat is very much out of the bag' However the timing or method of the share transaction, save being triggered by the sale of the company, is not written into the contract in any detail. In consequence am I correct in understanding that instead of any tax liability due to the gifting of shares, being met by me personally ( as I have agreed in their contracts) it can be met by the Company?....if so, I like it!
Apologies if I have misunderstood you.

[AvocadoK]

I agree with simplytax that we are looking at an income tax/NIC charge here. The shares given to the directors would be 'employment related securities' as defined in the tax legislation, and tax would be assessed on their value when given to them. The income tax would be directly assessable on the directors rather than via by deduction through the PAYE scheme, unless the shares were readily convertible securities. If you have signed an agreement to say you will 'pick up the tab' for tax, then you would have to reimburse them.

Alternatively, if you gave them cash after the sale, that would be taxed on them through their tax returns. In some situations, you can argue that it is tax free because the gift is for personal reasons rather than anything to do with their employment. But if is written into their contracts, it will certainly be subject to income tax.

A possible solution is to draw up a share option scheme using Employment Management Incentive (EMI) rules. The directors can be given the option to acquire shares at current (discounted for minority holding) value, the option only to be exercised in the event of a company sale. Their slice of the proceeds would then be subject to CGT at 18% rather than income tax at 40%.

You would certainly need professional advice on this, not least because you have personally agreed to settle their tax, and that could be a big number unless you do something about it!

AK