How we solved a client’s share puzzle and avoided a £200,000 tax liabilityPosted 2014 by admin
Our client owned 100% of the shares in a limited company in a high-tech industry. The company had been trading successfully for a number of years and had built up goodwill and substantial reserves.
The Owner now said that he wanted some help in the business and asked us to deal with the stock transfer paperwork to introduce a new shareholder/employee into the business. He intended to gift this person a 50% stake in the company.
This immediately set alarm bells ringing as the new shareholder would be deemed to have acquired the shares by virtue of his employment. This would give rise to a tax liability of at least 40% of the value of the shares in question, perhaps £200,000 in tax, and would certainly have prevented the transaction from proceeding.
Despite the obvious obstacle, we advised him that there was a solution to the problem. In order to avoid the tax charge we agreed with our client to amend the company’s articles of association so that the current value of the company was ring fenced into a separate class of shares.
The new shareholder was then issued with shares that had a current zero value but would benefit from the future increase in value of the company that he directly contributed to. Consequently, much to all parties satisfaction, the £200,000 tax charge was avoided and the share transfer was able to go ahead.
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