In the scenario where two retiring directors (parents) receive termination payments of for example £6,500 each and then gift their shares to the remaining (son) shareholder, several legal and tax considerations arise. Here’s an overview of the key aspects to consider:
- Company Law Considerations (Companies Act 2006)
- Termination Payments to Directors
• Termination payments to directors are allowed but must comply with:
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1. Director’s Service Agreement: Check whether the contracts entitle them to termination or ex-gratia payments.
2. Shareholder Approval: If the payment exceeds £50,000, shareholder approval is required. In example case, £6,500 each falls below this threshold, so no formal shareholder approval is necessary unless required by the company’s articles - but I owuld advocate this for transparency for all involved.
3. Fairness to the Company: Payments must be justifiable in terms of company benefit and avoid being considered disguised dividends or excessive remuneration.- Gifting of Shares
• Directors can gift shares to the remaining shareholder, but the following should be considered:
• Company Articles of Association and Shareholders’ Agreement: These may (usually) contain pre-emption rights or restrictions on share transfers.
• Stamp Duty: No stamp duty is payable on a gift of shares, as long as no consideration is given.
• Documentation: A stock transfer form must be completed, and the transfer recorded in the company’s register of members.- Tax Implications
- For the Retiring Directors (Personal Tax)
• Termination Payments:
• The first £30,000 of a termination payment is tax-free if it qualifies under the statutory rules (e.g., for loss of office).
• If the payment is contractual or linked to employment, it will be subject to Income Tax and National Insurance as earnings.
• HMRC may scrutinise payments to ensure they are not disguised dividends or bonuses.
• Gifting Shares (Capital Gains Tax - CGT):
• Gifting shares to another shareholder can trigger a deemed disposal for CGT purposes, potentially leading to a tax liability on the giver.
• If the shares have increased in value since acquisition, the donor (retiring director) might face a capital gains tax liability. See next doc about this, usually P.E.T.s
• However, Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) could reduce CGT to 10% if qualifying conditions are met.- For the Remaining Shareholder (Personal Tax)
• Receiving gifted shares does not trigger immediate tax liability for the recipient.
• However, if the recipient later sells the shares, their base cost for CGT will be deemed to be the market value at the time of the gift.- For the Company (Corporation Tax)
• The company can deduct termination payments from taxable profits if they are made wholly and exclusively for the benefit of the trade.
• However, if HMRC deems them excessive or not commercially justified, they may be disallowed.- Alternatives to Consider
If the intention is to efficiently transfer ownership, consider:
• Buyback of Shares: A share buyback may be more straightforward from a tax perspective if done correctly, provided distributable reserves exist.
• Employee Ownership Trust (EOT): If the remaining shareholder is also an employee, an EOT structure might offer tax advantages.
• Deferred Consideration Arrangement: Rather than gifting, a gradual purchase via deferred consideration could offer flexibility.- Practical Steps to Take
- Review Articles and Agreements: Ensure there are no restrictions on share transfers.
- Assess potential CGT and income tax implications.
- Draft a stock transfer form and board resolution to approve the transaction.
- Update the register of members and PSC (Person with Significant Control) register if applicable.