Shares transfer brings tax risks
JH writes: My business partner needs to raise funds, but I am reluctant to pay out additional dividends as this would put a strain on the company’s working capital. I have offered to loan him the money, but he refuses to take on such a debt. He has suggested he sells me some of his shares in our company, so that instead of having equal shares, we will move to a 60:40 split. Does this create any immediate tax issues?
The sale of shares will be a disposal by your fellow shareholder for capital gains tax purposes, writes Jon Sutcliffe, partner at Kingston Smith LLP.
Depending on the value involved, this could give rise to an actual tax liability, albeit potentially at the 10% entrepreneurs’ relief rate. The sale will also attract stamp duty at 0.5%.
Given the reason for the sale, you will presumably be paying full market value for the shares. Check that any provisions in the company’s articles or any shareholders’ agreement are complied with, both in terms of the value put on the shares and the transfer itself. Also, consider carefully the basis of any valuation and remember a 10% holding is not necessarily worth the same as 10% of the whole company.
If there is any element of over or under value in the price paid, there could be potential income tax liabilities under the employment-related securities rules. These are complex and you may want to take advice on your specific circumstances.
Finally, remember that the transfer is likely to change the balance of voting power within the company and the payment of dividends by the company in your favour. Any shareholders’ agreement may need to be updated to ensure that it fully reflects the future relationship between the two of you as shareholders.