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Paying income tax on a sale of shares

Posted on February 15, 2010

The UK Supreme Court has released a judgment upholding an income tax charge on the sale of shares. This underlines the need for private companies to obtain competent professional advice in relation to all share transfers.

Share rights were attached to a certain bundle of shares for which the beneficiary was the MD of the parent company. The rights agreed were that if certain conditions were met on the sale of the parent company, the MD would either get a disproportionate share of the sale proceeds from the purchaser or the parent company would buy back his shares for greater consideration than that realised at sale by other shareholders.

These specific rights were expressed in the Shareholders Agreement rather than the Articles. The company argued that the rights in SA and Articles are one in the same essentially. The Court disagreed stating that the rights were personal to the individual and did not hold any value to the hypothetical buyer, therefore, should not be taken into account when calculating 'market value' of the shares. The individual was taxed on the sale his shares which could have been avoided, had the deal been structured differently.

This case shows the importance of water tight drafting in the share administration process where consequences and pitfalls can be identified early on. Had the parent company issued a separate class of shares or used performance related criteria, the tax liability could have been charged as capital gains (10%) rather than income (40%).

For advice on setting up a safe and accurate scheme that provides efficient tax benefits, call one of our experts on 020 8949 5522.


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