Gifting Shares… if you’ve got to…

So you want to give some of your shares to staff or family members?… it may trigger a Capital Gain Tax bill for you, and an Income Tax bill for them… even if no money has changed hands… so some care is needed

Gifting Shares to Employees

Don’t do it… simple as that… if you give them shares it’ll most likely be deemed to be ’employment related’ and they’ll get an income tax bill they won’t thank you for… (of course you could always pay that bill for them if you’re feeling really generous / loopy) …

… and they & the company will have to cough up NI contributions as well…

There are much better and more tax efficient ways to get some shares into an employee’s hands…. see EMI…

Gifting Shares to Family

Gifting to family (and non-employees) can be done totally tax free if care is taken…

Here’s the basics :

… when you give away shares it’s classed as a disposal at market value and triggers a Capital Gains Tax liability…

But… you can claim Gift Holdover Relief... which, to paraphrase HMRC,  means you do not pay Capital Gains Tax when you give away the shares… instead, the person you give them to pays Capital Gains Tax when they sell them…

All you BOTH have to do is fill in a simple form and the gifting of your shares will be CGT and Income Tax free… (it’ll even be Stamp Duty free if you claim Stamp Duty Gift Relief Exemption)

But what if the family member is an employee too ?

Aye, there’s the rub… gifting shares to employees is normally treated as Income Tax-able… but if it can be demonstrated that the gifting of shares is for reasons of family or personal relations, the income tax charge should be avoided…

eg… 2 kids… 1 working in the business, 1 not… only gifting shares to the 1 in the business may seem more like a reward than a gift???

And do you really need to do it now?

Gifting to a family member now may run the risk of a CGT or IT bill (eg if it is deemed employment related)… but leaving it in your will will avoid all taxes because shares in your trading company sit outside your estate on death…

(for IHT purposes a Trading Company is one that has no more than 50% non-trading activities…)

Gift now… or leave in Will… ?

It’s all about the ‘base cost” of the shares the receiver is getting…

Gifting… if you Gift the shares and get Gift Holdover Relief  the receiver’s ‘base’ cost for CGT purposes is the original cost of the shares to you…

Leaving in will… the shares will be IHT free due to BPR… and the base cost of the shares to the receiver will be the value at the time they receive them from your estate…

example… You founded a company with the typical £1 share start up company structure… 10 years later the company is worth £10m… and 1 year after that it is sold for £15m…

  1. gifting these shares when they were worth £10m would mean the receiver would pay CGT on the full £15m sale price when they sell the shares… (CGT at 20% would mean a £3m tax bill)
  2. if you left these shares in your estate rather than gift them and died in year 10… the shares would transfer free to the receiver, and establish their base cost at £10m… on selling the company the receiver would pay CGT on only the £5m gain in value from the £10m value when they received the shares… (CGT at 20% would mean a £1m tax bill)

Of course there are reasons for choosing Gifting over Willing (wanting to pass on control of the company… to incentivise the receiver… etc)… but from a tax point of view… inheriting shares rather than being gifted them will end up in a reduced CGT bill for the receiver… over time… should the shares ever be sold… !

Gifts With Reservations… a rather obscure IHT Trap…

Gifting shares to reduce exposure to Inheritance Tax (IHT) whilst continuing to benefit from the gifted shares may be caught by GWR anti-avoidance rules… if so, the shares get put back into the giver’s estate for IHT purposes…

The giver can continue to receive reasonable commercial remuneration for their work in the company… but HMRC say if as a part of the transaction ‘new remunerative arrangements are made you will need to examine all the facts to determine whether the new package amounts to a reservation’

Tax Insider 162

Trust a trust?

Trading companies for IHT purposes (no more than 50% non-trading) qualify for Business Property Relief (BPR) and so there are no IHT liabilities on gifting their shares… so placing shares into a family trust in which the children are beneficiaries will not generate a tax charge under IHT or GWR rules… even if the parents are trustees and get paid for their efforts (but votes from the shares must be used in the interests of beneficiaries)

Tax Insider 162

Mind The Gap !

If you can foresee your company breaching the 50% non-trading company limit for IHT purposes… consider gifting the shares before you exceed the CGT non-trading company limits of 20%

Say… right now you have a 100% trading company… but as profits grow and funds are left in the company it will invest in property… 20 years of that and you may have a company that breaches the 50% limit for non-trading activities when it comes to IHT… so… it may be best to gift the shares before the company breaches the 20% non-trading CGT Gift Holdover Relief threshold

(although one aggressive interpretation of the non-trading rules says it only has to be a trading company at the time of gift..)

If Gifting shares is a problem… just issue new shares instead?

O no you don’t ! … TCGA 1992 says effectively that if a person who has control over a company exercises it in such a way as to cause value to pass out of that current owner’s shares and into other shares in the company it will be treated as a disposal of the existing shares.

Tax Insider Business 84

Part Payment won’t work either! …

The difference between the payment and the market valuation of the shares would be a benefit that would be subject to income tax (and NI)

Undervaluation wrinkle…

… if the share transfer was deemed to be below market value HMRC could seek to tax the difference as employment income. If you want to protect the employee from a nasty IT bill later you could include a consideration adjustor clause in the contract around the share transfer so that the consideration is altered to the HMRC agreed amount upon any successful challenge by them of that share value (Ballards)

Gifting Tax Summary… rough… for shares in a trading company (or the holding company of a trading company)

IT… employee may suffer it if deemed employment related (or even disguised remuneration)

NICs… company and employee may suffer NIC if employment related

CGT… should be no problem if Gift Holdover Relief claimed…  claim has to be made by giver & receiver (company must be no more than 20% non-trading)

IHT… shares in trading company should attract BPR so should be no IHT issues (outside of estate) … (company must be no more than 50% non-trading)… take care with post gift remuneration packages / arrangements because of GWR

SD… should be no problem if SD Gift Exemption relief claim

Take care it is a trading company… if the company has ‘chargeable non-business assets’ (eg  investment property) the gift relief may be restricted

and here’s an article trying to hustle up fees for tax advisers

Ross Martin link

 

 

BS Shareholder schemes

CSOP … SAYE … SIP … schemes to get shares into the hands of staff … to be avoided … because there are simply better ways to do it…

If you really need to know why …

SIP and SAYE must be offered to all employees on similar terms … yeah right

CSOP (the Company Share Option Plan) used to be the scheme of choice for companies like yours … but it’s bobbins compared to the newer and funkier and government favoured EMI (just one eg …CSOP caps the share values at £30k … under EMI it’s £250k)

(See EMI … Growth Shares … and EMI v GROWTH SHARES)

Amortisation

The depreciation of an intangible asset

CHECK..what can be can capitalised… R&D complications

Takeaway … change your policy … ID all costs that could be classed as intangible … stick them in the balance sheet and boost your EBITDA

The basic idea … you put the cost of intangible assets in your balance sheet … and amortise / write-them off / spread the cost of them through your P&L over their expected useful life …

eg you spent £100k on product development costs this year … but you don’t expect to start selling that newly developed product until next year… and you’ll sell it for 4 years…

Move the full £100k cost to the Balance Sheet

Profits go up by £100k … Assets go up by £100k

You now amortise that asset over the 4 years you’ll be using it to generate revenues

So next years profit will be hit by a £25k amortisation charge … and the asset will fall in value to £75k

Year after profits hit by £25k … and the asset value is now £50k … rinse repeat

Why does it matter when trying to boost the value of your deal ?

Because you can take costs out of the P&L … which pumps up EBITDA

Note … Amortisation is the A in EBITDA… and EBITDA is profit before A … so you can see amortisation costs do not effect EBITDA… or your company value

So ID all the dev costs you can and get them out of your profit figure

Using the above example and assuming a multiple of 7 is being offered for your company I just added £700k of value to the deal …

Not too shabby for a bullshit bookkeeping exercise and the application of appropriate accounting policies

Steps you need to take

1. Change your accounting policy … it is now company policy to capitalise development costs and amortise them over their useful life …

2. ID all dev costs you can … internal and external costs

Technical stuff

Under FRS102 the basic rule is … capitalise development costs … which then fall under the Intangible Assets regime … which means the tax treatment follows the accounting treatment … which means if you amortise £25k of intangibles this year your profits for tax purposes will be lower by £25k

If you are daft enough to file Micro-Entity accounts you have no choice but to write off all costs … no capitalising of intangibles is allowed

What can you capitalise ?

Here’s some examples

Innovate

R&D tax reliefs and grants work … will Patent Box work better?

Innovation is one of the best drivers of growth for an owner managed business… and luckily the Government really does get it… offering some bonkersly brilliant and accessible help that actually works for companies like yours…

As a form of Corporate Welfare (which I’m generally against) these innovation-orientated tax breaks and grants rather surprisingly do what they’re supposed to do… boost productivity and create jobs (which I absolutely love)

Innovate UK are busy getting grant money out to innovative firms… and, as the Enterprise Research Centre recently reported, the range of grants available has made a real impact… Over a 13-year period, R&D grants spurred growth worth £43bn to the British economy – more than five times the £8bn invested – and created around 150,000 jobs

… one helluva an ROI

But R&D Tax Reliefs  are doing even better imo… not only does research suggest this tax saving for SMEs is working financially…  Our current evaluation suggests that for each £1 of tax foregone, between £1.53 and £2.35 of R&D expenditure is stimulated… I believe it is changing the mindset of some of the companies applying…  

What started out as an attempt to justify a claim for a extra tax deductions and get money back from HMRC… is morphing into a mindset shift for the companies involved as they start to genuinely put innovation at the heart of what they do…

And I think the Patent Box could take that shift towards innovation to a completely different level…

The tax relief for having a Patent is now so good that companies I tell about it immediately start to think what they are doing or can do that’ll lead to a narrow patent and get them a 10% Corporation Tax rate for a couple of decades…

Changing minds is surely one of the hardest things for a Government to do… but, because of these innovative tax reliefs, minds really are changing when it comes to innovation

Here’s a couple of older blog posts on the subject…

R&D Relief

First Claim

Patent Box

And a great (if slightly technical) site for keeping up to date with any odd updates to the tax reliefs…

Keeping tabs on changes to reliefs

 

 

 

website cost or not

Website… a Cost or an Asset?


Your own view doesn’t really matter… but what your accountant thinks does… because your website can be treated as an Asset and not a Cost…

… which means a boost to this year’s Profits… a strengthened Balance Sheet… and an improving credit rating…

Old Rules

For most of you, in the past when you bought or built a new website the cost was written off through the Profit & Loss…

A lucky few who built their own may have had an accountant prepared to use UITF Abstract 29 Wesbite Development Costs (issued in February 2001) to take those costs and put them into the Balance Sheet as a Tangible Asset…

… and a luckier few who paid for a site to be built for them had accountants happy to capitalise website costs as an Intangible Asset

New Rules

For year ends December 2015 & onwards there’s a new set of accounting rules FRS 102 replacing the old rules…

… if you’ve recently bought or are developing a new website for yourself you need to get your accountant to look carefully at how those costs get treated…

Because I see no reason for most of those costs to hurt your bottom line (unless you want them to!)… a bought website can be capitalised as an Intangible Asset… an internally built website can be Tangible or Intangible…

As the ACCA say … FRS 102 leaves it up to you and your accountant to ‘develop a suitable accounting policy’…

The Tax Man

So what does the tax-man make of your website…? well… here’s what they say

“The cost of a web site is analogous to that of a shop window. The cost of constructing the window is capital; the cost of changing the display from time to time is revenue”

So the Tax Man says the building or buying of your new website can be an Asset… later content & changes can be Costs…

But bear in mind that if you do choose to treat your new website as an Intangible Asset…

… your taxable Profits will go up (by moving costs out of the profit and loss)…

… and in future years they will be lowered by Amortisation (a fancy word the Depreciation of an Intangible Asset)

So… Website… a Cost or an Asset?

Up to you & your accountant really… but I guess that decision will be informed by whether or not you want boosted Profits & Balance Sheet this year?

Either way…

‘Nobody Dies’