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Taxation of share payments
I was disappointed to read the reply to this question, printed in the newspaper on October 1. As a business and tax advisor to the SME sector myself I felt that the answer was poorly focused and missed several key points:
1. The open market value of the shares received in lieu of payment is likely to be very low, especially if the shares constitute a minority shareholding, as they undoubtedly will.
2. A chargeable gain on the subsequent sale of those shares by the small consulting company concerned is likely to be taxed at 19 per cent on the first portion (up to £300,000) and 32.75 per cent on the next, depending on other profits in the year in question using part of the £300,000 lower rate limit. Any subsequent dividend to the owner of the consulting company will be at a further 25 per cent of the net, assuming they are higher rate tax payers. This comes to somewhere between 40 per cent and 50 per cent approximately. Compare this to possible capital gains tax to the individual of 10 per cent should he or she sell shares in an unquoted trading entity, then the key focus of this answer should have been to get the shares out of the company and into the individual’s hands as soon as possible. Noting the answer in my first point, the immediate advice should have been to see if the shares given in lieu of payment qualify for the tax relief (i.e. can get the 10% rate of tax) and ensure that the shareholder in the paying company will allow them to be held by the individual. Then a distribution in specie (at a low value) to the shareholder of the consulting company should have been done. Given the final sentence of the question then I would have thought this was the obvious route to take with the answer.
3. Finally, the shares will only be worth taking if they can be sold. If they constitute a minority then they will be unmarketable. This will make them worthless in reality. However, if the consultant is convinced that they will be floated or 100 per cent of the company will be sold then they will have value. After all, there is no tax problem if you never earn any profits. A point overlooked compared to the more encompassing advice to your first question.
I hope that the above is useful. Please contact me if you would like further details.
Graham Wallace, partner at chartered accountants Barnes Roffe