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Promoting employee into company shareholding.
A client and his wife run a trading business through a limited company of which they are shareholders. They are thinking of promoting a long-standing employee into the shareholding of the company (by allotting new minority shares). This is to reward past services and to motivate future performance.
We have considered some obvious aspects, such as non-tax implications of introducing a ‘stranger’ into the family business, as well as the tax implications on granting shares to an employee.
The tax charge arising on the market value of the shares at the time they are granted is considered acceptable by both parties and we are satisfied with the other tax implication of awarding the shares.
My question is rather focused on the income side. For the past few years, the employee has been paid under PAYE – but this will cease on execution of the arrangement (the contract will formally cease the employment arrangement, although the employee’s activities in practice are likely to remain unchanged) and he will thereafter be remunerated solely by way of dividends.
That being the case, is there any scope for HMRC to recharacterise dividend income by the former employee as a sort of disguised employment remuneration?
Query 19,991 – Imperial.
Will SDLT be due on sale of deceased’s share in a property?
An adult (John) and two elderly parents (Peter and Janet) owned a house as tenants in common: John 50% and Peter and Janet 25% each. The original mortgagor would not accept three names on the mortgage so only Peter and John were named on the title, with Janet’s interest being noted on the land registry.
John took out, and was responsible for, the mortgage (although Peter was also on the mortgage) and Peter and Janet both put in capital. The mortgage was for less than 50% of the cost. Peter died and left his 25% share in the property to be divided equally between his adult children John and Susan, in trust during the life of the surviving parent. There were mirror wills between the parents.
John needs to remortgage and has been told that the will trust is an insuperable obstacle. The family has agreed to end the trust and hold the property 50/50 between John and Janet, with Susan’s interest in the estate (she has no stake in the house) being covered by the wills of the surviving parties.
The ultimate intention is, should Janet predecease the children, that each child will inherit 25% of the parents’ 50%, and then John will buy out Susan’s quarter share and become sole owner.
The solicitor handling the removal of the will trust has suggested that: (a) the will trust will need to be registered with HMRC even though it will be ended before the September deadline; and (b) the conveyance of Peter’s 25% share from the trust to Janet may result in SDLT becoming payable. This seems unlikely. Am I missing something?
Query 19,992 – House Elf.
Identifying sold shares from a pool of shares.
My client owns some shares that were purchased under the business expansion scheme, so that any capital gain that arises on disposing of that holding is exempt from tax. However, he has also acquired additional shares of the same class in that company in the intervening period. While the capital gains tax matching rules are designed to allocate costs between the various parcels of shares, I cannot see how to identify which shares have been sold from what is now considered to be a pool of shares for the purpose of claiming the exempt gain.
Any guidance would be welcomed.
Query 19,993 – Lost.
Should reclaimed VAT be repaid?
My client is a father and son partnership which was established in August 2021 with a view to importing and distributing clothing. As part of their original business plan, they purchased warehouse premises for £125,000 plus VAT, the building being bought brand new at that point from the developer.
VAT registration was applied for from the outset and VAT reclaimed successfully on the building. However, no business activity was undertaken between August 2021 and July 2022, because of problems sourcing the goods from China.
Imports have now started arriving and VATable supplies will be made in the UK of adult clothing. It is the intention of the partners to transfer the business only into a limited company for protection purposes. There is no borrowing involved and hence no financial requirement to charge rent by the partners to the new company; the building was bought outright.
Will this mean that the VAT previously reclaimed by the partnership has to be repaid or, alternatively, should the partners now opt to tax the building and charge VAT on the rent from themselves to the company? As an aside, assuming the building is opted for VAT would it be possible to charge a peppercorn rent to the company in these circumstances?
Query 19,994 – Partridge.
