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Will TAAR cause you problems on company distributions? (New Share Rules)

Successful Businessman With A Contract In Hand

HMRC are currently consulting on new rules to start in April 2016.

The consultation is focusing on Capital Gains Tax (CGT) ways to extract money from companies to create Target Anti Avoidance Rules (TAAR) covering:

  1. A disposal of shares to a third party
  2. A distribution made in a winding up
  3. A repayment of Share Capital including Share Premium
  4. A valid purchase of own shares in an unquoted company

Here are the examples of ‘problems’ HMRC want to resolve, Example 1 is ‘moneyboxing’ and/or ‘phoenixism’ and sometimes involves ‘special purpose vehicles’

Example 1

Example 2 involves creating a holding company…

Example 2

The consultation ends on the 3rd February 2016, the results are likely to be controversial!

steve@bicknells.net

Can my Pension buy shares in my company?

Successful Businessman With A Contract In Hand

A pension scheme can buy quoted or unquoted shares in a company based either in the UK or overseas.

An occupational pension scheme can buy shares in one or more of the employers participating in the scheme as long as both the following conditions are met:

  • the total value of the scheme funds invested is less then 20% of the net value of the pension scheme funds
  • the amount invested by the scheme in the shares of any one employer participating in the scheme is less than 5% of net value of the pension scheme funds

Any investment larger than this will be an unauthorised payment and both the scheme employer and scheme administrator will have to pay a tax charge on the amount above the limit.

https://www.gov.uk/pension-trustees-investments-and-tax

So in theory, yes, it is possible, but in reality its likely to fail because:

  1. An independent ‘Arms Length’ valuation will be required, for an unquoted small business or start up this is extremely difficult as establishing a market value for the shares will be difficult and often a start up will have losses in the first few years
  2. The HMRC’s rules which govern all registered pension schemes (in particular the sections covering both taxable property and tangible moveable property) dictate that the combined shareholding in the unquoted company held between the pension fund, the member personally and any other connected persons must never exceed 19%, otherwise there would be enormous tax consequences for all concerned
  3. The company concerned must not (and never should be in the future) controlled by the trustees of the pension fund in conjunction with connected parties

If the business needs the money to buy commercial premises for its trade it would be easier for the pension scheme (SSAS) to lend the money, a SSAS can lend up to 50% of net scheme assets as explained in in this fact sheet from Curtis Banks

If you are over 55, you could also consider drawing down funds from your pension, the first 25% will be tax free.

steve@bicknells.net

Share Buy Back Multiple Completion Checklist

Successful Businessman With A Contract In Hand

Exit planning is critical if you want to save tax.

Typically when a shareholder wants to leave a business, the company will buy back the shares, but often the company wants to pay in stages to ease the cashflow.

The problem is that buy back in stages generally means that Entrepreneurs Tax Relief can’t be used and to make things worse the buybacks will be tax as a distribution.

The Companies Act prohibits buy back by instalment, however HMRC Tax Bulletin 21 says…

The Board can only consider a request relating to a transaction which appears to be a valid PoS. The Companies Act 1985 lays down certain procedural rules which must be followed. Also, the consideration for the shares must be paid immediately and must be paid in money. The first of these requirements means that payment by instalments is not possible. It is, however, possible to make a contract under which successive tranches of shares are to be purchased on specified dates.

So here is checklist of things to consider to create a multiple completion:

  1. Ask HMRC for advance clearance – the buy back will be treated as a single event and subject to Entrepreneurs Tax Relief on the whole amount on day one
  2. Make sure your solicitor draws up an agreement that transfers beneficial interest on day one whilst retaining a legal interest
  3. Whilst the shares still exist beneficial interest has been disposed of
  4. Voting rights can no longer be exercised
  5. The creditor for deferred completion must not be loan capital

Clearly you will need professional advice from your solicitor and accountant to create a multiple completion contract.

steve@bicknells.net

If your share value falls, so could your tax bill

fictitious newspapers

Did you know that in the case of Mr Brown v HMRC Mr Brown was able to claim a tax deduction for the loss in his share value without having to sell his shares? Its true, its known as a NegligibleValue Claim and HMRC have Help Sheet on it (286).

A negligible value claim enables you to set a capital loss against your income (or against other capital gains if you have them) for earlier years and claim a tax refund.

Many negligible value claims are made by shareholder directors whose company has failed. Their claim is to offset the loss on the shares in their company against their directors’ wages for earlier tax years.

When a taxpayer owns shares which become of negligible value the taxpayer may make a claim under s24 TCGA 1992, resulting in a deemed disposal and reacquisition, which crystallises a capital loss.

steve@bicknells.net

What if I give my shares away?

Balance sheet business diagram

There is a common mis-conception that if you give something away it doesn’t have any tax implications, unfortunately, that isn’t the case.

When you give away shares you usually work out your gain or loss as if you’ve sold the shares at market value. The market value is the price you would expect to receive if you sold them on the open market. This also applies if you sell them for less than their full value.

There are some exceptions:

  • if you can claim Gift Hold-Over Relief
  • if you give the shares to your husband, wife or civil partner
  • if you give shares to a registered charity

To qualify for Gift Hold-Over Relief, the shares must be in a trading company, or the holding company of a trading group, and one of the following must apply:

  • the shares aren’t listed on a recognised stock exchange
  • you’ve at least 5 per cent of the voting rights in the company

You don’t pay Capital Gains Tax when you give (or otherwise dispose of) shares, to your husband, wife or civil partner, providing both of the following apply:

  • you’ve lived together for any part of the tax year in which you made the gift
  • the gift isn’t ‘trading stock’ (trading goods bought for resale)

You won’t have to pay Capital Gains Tax on a gift of shares to a registered UK charity.

HMRC have further details and a Help Sheet 295 containing further details.

You can ask HMRC to check your market valuation by submitting Form CG34 it will take at least 2 months.

Settlements Legislation S624/S660

If you think moving shares in your company between yourself and your spouse sounds like a great way to save tax, think again!

Since the 1930’s we have had Settlements Legislation which prevents you from giving income or assets to someone else in your family in order to pay less tax.

Where the anti-avoidance Settlements legislation applies, all income transferred by a settlement is treated as that of the settlor.

steve@bicknells.net

Employee Shareholders – will your employees want shares?

Successful Businessman With A Contract In Hand

The Growth and Infrastructure Act 2013 comes into force on 1st September 2013 and Section 31 makes changes to the Employment Rights Act 1996 inserting section 205A Employee Shareholders.

205A Employee shareholders
(1) An individual who is or becomes an employee of a company is an “employee shareholder” if—
(a) the company and the individual agree that the individual is to be an employee shareholder,
(b) in consideration of that agreement, the company issues or allots to the individual fully paid up shares in the company, or procures the issue or allotment to the individual of fully paid up shares in its parent undertaking, which have a value, on the day of issue or allotment, of no less than £2,000,
(c) the company gives the individual a written statement of the particulars of the status of employee shareholder and of the rights which attach to the shares referred to in paragraph (b) (“the employee shares”) (see subsection (5)), and (d) the individual gives no consideration other than by entering into the agreement.
(2) An employee who is an employee shareholder does not have—
(a) the right to make an application under section 63D (request to undertake study or training),
(b) the right to make an application under section 80F (request for flexible working),
(c) the right under section 94 not to be unfairly dismissed, or
(d) the right under section 135 to a redundancy payment.

Giving up employment rights might not sound like a good idea for employees but there are tax advantages for both the employee and employer:

  1. Dividends are not subject to PAYE or National Insurance
  2. Dividends would not be used as Pay in Auto Enrolment
  3. Capital Gains Tax Allowances should make most gains tax free
  4. The employer will benefit from cost savings on the sacrificed employment rights

 

steve@bicknells.net

Why have multiple classes of shares?

Successful Businessman With A Contract In Hand

Businesses tend to start off just having ordinary shares with full voting and dividend rights, however, there are lots of good reasons why you might create multiple share classes:

 

1. To reward the owners based on their contribution – for example say one owner worked full time and the other only part time – they may want dividends to be based on their efforts whilst still retaining their original voting rights

 

2. To offer non voting shares to employees

 

3. Convertable or Redeemable shares might be offered to an investor

 

4. Preference Shares might have a fixed dividend

 

Dividends are very tax efficient so its great way to reward the owners for the risk of running a business.

 

Always seek professional advice before making changes to check for capital gains, settlement and other tax and legal issues, better safe than sorry.

Then before creating additional share classes check your articles of association and change them if necessary, then you will need a resolution to create new share classes, fill the appropriate forms at Companies House and then you are ready to go.

 

 

steve@bicknells.net

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