Overcoming issues associated with adding shareholders

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Jemima Jones, Partner

Jemima heads up the tax department for Heathrow and specialises in advising owner managed businesses and shareholders over a variety of sectors.

Nov. 3, 2017

If you run a limited company and you are thinking of introducing a new shareholder, then you may find this trickier than you had anticipated.

Shares issued to an employee must be paid for at the current market value if you want to avoid any tax implications – but you might not know what that market value is. It also presents complications because the current value may be a lot higher than the current shareholders and the employee were expecting to contribute for the shareholding.

The temptation is to pay less than the current market value, which is an option, but the discounted rate will be subject to Income Tax and potentially National Insurance.

There are a few ways to overcome this, such as:

  • You could obtain a business valuation. It may well be that the value is an amount that is realistic for an incoming shareholder to pay.
  • This value can then be frozen into the current shares and a new class of share issued. This would mean current shareholders would effectively receive a premium on their shares on exit, with amounts over and above this premium being paid to all shareholders pro rata to their shareholding.

This new class of share would then have nominal value only and additional amounts paid would be credited to the share premium account. There is one drawback to this – if you are expecting several new incoming shareholders over the year, this will create ‘alphabet shares’, something HMRC is not overly fond of.

In which case, should there be another incoming shareholder in the pipeline, you may wish to consider bringing them in sooner such that the value would still stand, and therefore the same new class of share could be issued to that person.

Each case is different and it is recommended that you seek appropriate advice from the tax advisers at Wilkins Kennedy before making any arrangements. Contact us for more information.

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