You may have hit upon a New Year’s Resolution: motivating one or more key team members with shares in your company.
You know they have no money to buy the shares, so instead you plan to give them the shares. But they will not thank you if your gift gives them an unexpected tax bill! Perhaps this is a gift horse your team should look in the mouth.
This blog assumes your company is profitable and/or has a positive net worth. The shares will have a value and a gift of shares will be a benefit in kind. So how to address this risk needs to be considered.
Gift or purchase?
- First, with the benefit of professional advice you must decide what you think your shares may be worth. HMRC will accept that a small minority interest in shares can be heavily discounted by perhaps as much as 75% of the whole company value divided by the number of shares in issue.
- You could simply make the gift at that discounted value and tell your employee to disclose the benefit in kind in their next self-assessment tax return. But your employee may not be used to completing a tax return (non-director employees are unlikely to need to file a tax return). Also by encouraging them to do this you may invite HMRC to consider (and dispute) the value you believe to be appropriate.
- Remember that by 6 July in the tax year following the gift your company should make a disclosure of the acquisition of the shares by your employee to HMRC.
- A simpler approach? There is nothing to stop you declaring a bonus which, net of tax, is sufficient for the employee to pay the market value. So instead the employee will acquire shares for market value out of taxed income. This approach will cost you the NICs (13.8% for the employer) but make life easier (and perhaps safer) for all concerned.
Restructuring of share capital
Another way to approach this will be a restructuring of your share capital before a share transfer (or issue) at a nominal price. In this scenario you will obtain a valuation and then restructure your shares so that all of that day one value rests with current shareholders.
This route avoids any upfront tax cost including NIC.
What if the employee is a family member?
You might be surprised to learn that gifting shares to a family member (your son or daughter) could land them with an income tax charge too.
The tax legislation (ITEPA) contains an exclusion for shares acquired by reason of “a right or opportunity arising in the normal course of domestic family or personal relationships”. But will HMRC accept that your circumstances come within this exclusion? Suppose you have three children and just your working son is given shares? Or suppose your children are being paid less than a market salary?
These factors might be evidence that this is not a straightforward gift.
You will also want to take tax advice on whether there could be a CGT charge for you. The gift could be a disposal so you may want to put a CGT holdover election in place.
Sale of shares through a Management Buy Out
Rather than think in terms of a gift you might instead want to consider an MBO that is funded by you as seller.
Provided this is a bona fide transaction (and you will want a tax clearance) then your shares could be sold at an arms’ length value. Structured through a NewCo you might be able to extract cash from the business (over say five years) paying tax of just 10% with entrepreneur’s relief.
This may be a great way to turn your shares into cash and allow you to incentivise your key employees. If your team are also your children, they will end up with a controlling interest and they and their non-working siblings can be gifted cash either in your Will or during your lifetime.
You will want IHT advice on these arrangements but this could be a great way to plan for your retirement tax efficiently.
Sign up to our newsletter to stay up to date with all of our news, blogs and events