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bigduckontax
bigduckontax, Accountant
Category: Tax
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I own all the shares in a company I set up 2.5 years ago.

Customer Question

I own all the shares in a company I set up 2.5 years ago. During this time I have developed a computer program and there is significant amount of IP in the program. The program is now finished and ready to be used, so as yet the company has no customers. I now intend to appoint X as a director and gift 10% of the shares to X for no consideration. What are the tax implications around the appointment of X as director and the gift of shares?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. If X becomes a director and is paid a salary then PAYE must be operated on his emoluments as directors are deemed employees per se. Your gift of 10% of the shares will be deemed to have been made at the current market value of the shares. By making the gift you have created a Potentially Exempt Transfer (PET) in your own Inheritance tax (IHT) position. PETs run off at a taper over seven years and in the event of your decease within that period are added back to your estate for IT purposes. PETs are the first to suffer IT and if your estate is insufficient to meet the tax on the PET it cascades down to the beneficiary for immediate payment. The gift is deemed a disposal for Capital Gains Tax (CGT) purposes and any gain made between your acquisition price and the market value on transfer will be subject to CGT. You do have an Annual Exempt Amount (AEA) of 11.1K to offset this gain or alternatively you may be entitled to Entrepreneurs' (ER) Relief which limits the rate of tax to 10% instead of the normal 18% or 28% depending on your income including the gain in the tax year of transfer. You elect for AEA or ER, whichever is the more advantageous to the individual. X is deemed to have received the shares at the current market value which may come into play on ultimate disposal when any gain would be subject to CGT. I do hope that my reply has shed some light on your proposal.
Customer: replied 2 years ago.
Thank you for the reply.
With no customers could it be argued the shares have no value? However, given the significant amount of IP in the program, would this counter the "no value" proposition and present a stronger argument the shares do have value?
Would the gift of shares fall within the employment related securities rules?
Expert:  bigduckontax replied 2 years ago.
It might indeed be so argued and the shares be merely of their nominal value. However, IP does have value, but its quantification may be somewhat difficult to determine. We are getting into the realms of a private company only being worth what some third party is prepared to pay to acquire. I cannot see the gift falling within the employment related securities rules particularly if the appointment as a director is made after the date of the gift, if at all. ESRM20020 is specific in its mention of: 'In deciding whether the employee has received reward for services in connection with securities, it is necessary to look at the extent to which, if at all, the employee has given consideration other than services' As this is a personal gift then it does not constitute remuneration. Please be so kind as to rate me before you leave the Just Answer site.
Customer: replied 2 years ago.
I am an accountant but I have never specialised in personal tax and my knowledge in this area is not up to date. It is good to speak to someone who is. Thank you.I have had a quick look at ITEPA 2003. Would s421B(2)(b) frustrate the appointment after the date of the gift since "employment" can also mean a prospective employment?Although X has would not have given consideration, could s421B(3) apply to treat the gift as being available by reason of an employment since the opportunity to acquire the shares would not satisfy the criteria in s421B(3)(a),(b)?
Expert:  bigduckontax replied 2 years ago.
Well, directorships are only a quasi employment. The PAYE restriction on emoluments is a tax avoidance or even evasion stop measure and is, I suspect, in many cases ignored. In any event if the remuneration is small there is no requirement to use PAYE anyway. You are giving your shares not the company and it would be the company which would be employing him as a director. I really don't think you need to worry as you and the company are separate legal entities. If the gift is before the appointment then the link, if any, is even less tenuous.
Expert:  bigduckontax replied 2 years ago.
I would think the real problem here will be the value of the company!
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support.