Can my Pension buy shares in my company? 2

Entrepreneur startup business model

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

Can my children own shares in my company? 3

Young working boy with tie on computer

The s660 rules (or settlements legislation) have been around since the 1930s.

The rules stop you passing income to someone else in the family, or giving income or assets to someone else in an effort to reduce your overall tax bill. This is called a “settlement”, and the aim of the legislation is to stop people settling their income on another person who pays tax at a lower rate. (Contractor UK)

There are some interesting cases where business owners have tried to pass shares to their children unsuccessfully

Copeman v Coleman [1939] 22 TC 594

A company had been formed to take over the taxpayer’s business. He held the shares equally with his wife. Later the company created a class of preference shares of £200 each carrying a fixed preferential dividend, the right to vote if such dividend were in arrear for three years or more and the right in a winding up to a return of capital paid up. Some of the shares were taken up by his children on which they paid £10 per share. Dividends substantially in excess of the amounts paid up were then declared and the taxpayer, on behalf of his children claimed repayment of the tax paid in respect of the dividend to the extent of that child’s personal allowance. (http://swarb.co.uk/copeman-v-coleman-1939/)

Crossland v Hawkins [1961] 39 TC 493

The taxpayer, a well known film actor, agreed to work through a company for three years being paid £50 per week. The shares were transferred to his wife and accountant. His father in law set up a £100 settlement for the benefit of his children of which his wife and accountant were the trustees. The fund was used to subscribe for the remaining 98 shares. He appeared in a film for which the company was paid £25,000. The company paid a dividend which was applied by the trustees for the benefit of the children. Jack Hawkins then applied on behalf of his children for a repayment of tax to give effect to their personal allowances. The repayment claim was rejected on the grounds that the whole arrangement was a settlement of which Jack Hawkins was a settlor because he had provided the funds for it. (http://swarb.co.uk/crossland-v-hawkins-ca-1961/)

Butler v. Wildin [1989] STC 22

A company was formed by two brothers who acted as unpaid directors. Shares in the company were initially held by their infant children, which were paid out of gifts from their grandparents. The company acquired a development site using a bank loan, which was guaranteed by the brothers. The company subsequently became profitable, and dividends were subsequently paid to the infant shareholders. The High Court held that the children’s investment of ‘trifling sums’ in the shares and the parent’s provision of services to the company constituted an arrangement. An element of bounty was given by the parents in the free provision of their skill and services, and by adopting any financial risk in the company’s venture. Dividends paid to those children born before the arrangements were made (but not dividends in respect of shares transferred to children born afterwards, as there was no apparent arrangement to benefit future children) were taxable on the parents, under what is now section 660B.(http://www.taxationweb.co.uk/tax-articles/business-tax/is-that-settled-then.html)

Jeremy Vine

Which brings us to the new case of Jeremy Vine

Mr Vine appears to have been using his ten-year-old daughter Martha to avoid tax payments.

The presenter of the Jeremy Vine Show and the TV quiz Eggheads, has been funnelling cash through a limited company, Jelly Vine Productions, of which she is a shareholder.

Jelly Vine Productions had almost £810,000 in cash on its books in 2013 – the last accounts available, and £1million in 2012. 

Read more: http://www.dailymail.co.uk/news/article-2983593/Jeremy-Vine-daughter-10-shareholder-lower-tax-bill.html#ixzz3Z09xqmtO

The rules are clear on this and income given to children under 18 will be taxed on their parents so what did his advisers have in mind?
steve@bicknells.net

Share Buy Back Multiple Completion Checklist Reply

Young woman with checklist over shoulder shot

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

Employee Shareholders – will your employees want shares? 2

Balance sheet business diagram

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

 

The Growth and Infrastructure Act 2013 was passed on 25 April 2013 – See more at: http://www.shepwedd.co.uk/knowledge/?a=5073#sthash.WVlFdcKS.dpuf
The Growth and Infrastructure Act 2013 was passed on 25 April 2013 – See more at: http://www.shepwedd.co.uk/knowledge/?a=5073#sthash.WVlFdcKS.dpuf

What if I give my shares away? Reply

Successful Businessman With A Contract In Hand

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

 

 

 

Did you issue shares to Employees or Directors? Form 42 due 6th July Reply

HMRC F0rm 42 – Employment-related securities – covers most situation where you issue shares to employees or directors, however, you may not need to complete the form in some circumstances:

  1. On Company Formation
  2. Allotment of shares prior to starting to trade
  3. Shares issued to Directors before the company starts to trade
  4. Transfers of shares in the normal course of the domestic, family or personal relationships
  5. Flat Management Companies
  6. Members’ clubs (formed as companies)
  7. Share for share exchange
  8. Rights Issues
  9. Bonus Issues
  10. Scrip Dividends
  11. Dividend reinvestment plans (DRIPs)
  12. Shares acquired independently by employees

Examples of what you must report:

  • The gift or purchase of shares by employees or directors.
  • The grant or exercise of options granted to employees or directors.
  • Anything that changes the value of the shares held by employees or directors.
  • The sale of employees’ or directors’ shares for more than their market value.
  • Cash cancellation payments to employees or directors.

Penalties

Penalties are not imposed automatically, the company is warned of their failure to make a report on a minimum of two occasions before the case is referred to the tribunal. The penalties can be £300 per responsible person and £60 per day outstanding.

Here is a link to the 2012 Form 42 http://www.hmrc.gov.uk/shareschemes/form42-2012.pdf

 

steve@bicknells.net

How to Issue and Transfer Shares in an SME 4

When you first form a limited company, the formation agent will arrange the issue of the Subscriber Shares.

Following that you can allocate new shares using Form 88(2)

http://www.companieshouse.gov.uk/forms/generalForms/882Revised2005.pdf

Before the Companies Act 2006 companies had authorised share capital so before issuing shares:

  1. Check the Memorandum and Articles
  2. Check any Shareholder agreements

As your company grows, the shareholders may need to transfer shares to new shareholders. To do this you need to:

  • Inform Companies House on the next Annual Return (you can only tell companies house who the shareholders are on an annual return so it could be a while before companies house get to know the the shareholders have changed)
  • Your Bank and Professional Advisers will need information on changes to Shareholders

Your shareholders need to be aware that if they give away shares or make a gain from selling shares they may be liable for Capital Gains Tax, however, they may be entitled to tax relief like the Entrepreneurs Tax Relief and that each year there is an exempt amount of capital gains for individuals.

steve@bicknells.net

Why have multiple classes of shares? Reply

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.

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 are ready to go.

If you have any questions please feel free to contact me.

steve@bicknells.net