It is acceptable for a shareholder to nominate someone else to hold their shares, if the company’s articles allow it (Section 145 Companies Act 2006). Therefore, a shareholder could nominate someone to attend and vote at meetings in their place, or they could nominate a relative to receive their dividends if they wish. However, the nomination rights are restricted, in that shareholders cannot delegate the power to enforce any of their rights against the company or to transfer their shares.
In these situations, the share’s legal interest is held by the nominee, while its beneficial interest is held by the investor.
There would normally be a Declaration of Trust between the Nominee and the Owner.
The ‘legal owner’ is shown as the nominee on the register of shareholders, attends shareholders meetings and votes, the ‘beneficial owner’ is hidden provided they don’t own more than 25% or have significant control over the board, otherwise they would need to have their details disclosed on the PSC register.
Nominee shareholders can be useful for investors who want professionals to manage their investment, they can then delegate authority to the Nominee to make decisions on their behalf.
The Beneficial Owner will be taxed in the normal way on dividends and capital gains.
What happens in the event of serious illness or death of a controlling shareholder?
Every business should have a plan in place. Normally illness and capacity will not change the voting rights but death will.
Usually the companies articles of association will contain rules which authorise the executors of a deceased shareholder to register as the share owners until they transfer them to the beneficiaries. This is often not the best solution.
A better way is to prepare a shareholders agreement which sets out what will happen.
Its worth considering:
- pre-emption rights – these arrange automatic transfer to named shareholders
- purchase rights – these will allow the company to buy back the shares from the beneficiaries
If you haven’t got a plan, make one before its too late
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:
- 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
- Make sure your solicitor draws up an agreement that transfers beneficial interest on day one whilst retaining a legal interest
- Whilst the shares still exist beneficial interest has been disposed of
- Voting rights can no longer be exercised
- 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.