On The Spot Blogs
#Tax Myth 12 - Tax is only due on money received
Now or later....For example, you're probably aware that when an invoice is raised it's usual to include it in Turnover. If the invoice is not paid by your year end, it will increase your Profits for tax purposes. Hopefully by the time the tax is due, normally 9 or 10 months after the year end, you've been paid so you're not losing out on cash flow.
However, you may not be aware that if as a shareholder in your SME company you rearrange your shareholdings by giving away shares to family non-spouse members or employees, tax can be due on you.
That doesn't make sense!
No it doesn't, unless you're the Treasury and you want to make sure taxable value doesn't disappear offshore or remains unrecorded.
How am I supposed to pay tax without receiving anything for the shares?
It's something to address before you give the shares away.
Is there a solution?
Happily, there's a solution.
If the shares are held in;
- An unquoted company or a company quoted on AIM, or
- A quoted company and you own at least 5% of the shares,
you and the recipient can sign a 'Holdover Election'.
What does a Holdover Election do?
This enables the recipient to pay the tax due on the shares, instead of you. Usually, when he has received some money on a later sale.
Here's an example
If you give shares in your company to your brother which cost you an initial nominal amount, but have a value of £50k, without the Election there would be a tax charge on you of about £4k which you'd need to find out of your own funds.
If, instead, you both sign a Holdover Election, your brother pays the £4k due when he sells the shares later on.
If your brother isn't resident in the UK, you can't enter this Election. You'd still need to pay the £4k through the tax return system, even though you didn't receive any money from him to help you pay the tax due!