Selling a small shareholding to another shareholder director in a company
September 15, 2020 at 2:07 pm #17939Jonathan LeaKeymaster
If the person is also a director as well as a shareholder, this means that whatever shares he holds will be classed as employment related securities. If he pays market value for the shares he gets then there is no tax issue. However, if he pays less than MV then the difference between what he pays and the MV is subject to income tax. This will be the case regardless of whether the company issues new shares or he is able to buy shares from existing shareholders.
If there are no terms agreed for a sale of the company yet, and so the odds of the shares being classed as readily convertible assets is minimal. The reason this classification is relevant is because it can affect the way in which income tax is applied to the difference between price paid and MV. A readily convertible asset is subject to PAYE and NICs, whereas one that is not is more likely just to be simple income tax through self assessment return.
There are potentially ways to minimise the tax impact for the director shareholder acquiring more shares. We could look at an Enterprise Management Incentive share option scheme.
Another possibility might be to create a new class of shares called a growth share. This new class would ring fence the current value of the company (lets say £0.5m) so that the director is issued with a sufficient number of this new class of share to equalise the shareholdings, but the new share would only entitle him to share in a capital distribution (sale proceeds or proceeds on a winding up) once the first £0.5m of capital had been paid out in accordance with the existing shareholding proportions. It’s probably not quite what he was thinking, but would avoid the income tax issue.
In circumstances like this, we recommend getting a tax advice note to explain the options available to you
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