Shareholders escape tax by issuing bonus shares

TH writes: I am a director of a private company. There are 4,000 shares with a nominal value of £4,000. I own half of them and another director owns the rest. We have not taken any salary from the company as we have other jobs (our main jobs for tax purposes). We would like to pay a bonus of 2,500 shares each (nominal value £2,500) before issuing a further 1,000 shares to friends. What are the tax implications?

Answer

The tax position will depend on the transaction, writes Chris Lane, a partner at Kingston Smith. There are no tax implications if the new shares to be issued are simply bonus shares for existing shareholders. For the company to have a bonus issue, it would need to have retained profits equal to the nominal value of the bonus shares. After the bonus issue the share capital of the company would be increased by the 5,000 shares and the retained profits of the company reduced by £5,000. If the company does not have profits of £5,000, it will not be able to issue shares by way of a bonus. If this were the case, you could split existing shares into smaller denominations to obtain the number required. Of course, in your proposal the percentage shareholdings of the two founders will not have changed before the new shares are given to friends. An alternative is to leave the existing shareholders the same and just issue 400 shares to friends. There are income-tax implications where shares are issued in lieu of remuneration. In this case the Inland Revenue would have to be told.