Best way to let director share in future profits
I am one of four partners who run a trading company. It is owned by all of us equally. We have just promoted a senior staff member to the board and would like him to share in our future success. We would like to give him a 5% shareholding but we are concerned about the tax implications for him. We value our business to sell at £4m. Therefore, we think he would have a tax liability of £80,000. Is this right?
Any shares given to staff will be taxed as an emolument. You have calculated the likely tax by taking 5% of your estimate of the current value and taxing this at 40%. This estimate of the tax is likely to be excessive in view of the limited rights a 5% stake bestows on the owner. The stake would not be valued at 5% of the whole and would attract a heavy discount. Your professional adviser should be able to tell you the likely value. There are other ways of rewarding your new director that are worth investigating. If your intention is for him to share only in the company´s future success, you could lock today´s £4m value into the current shares, which could be renamed "A" shares or "founder" shares, and then issue another class of shares in which he could partake. This would restrict any income-tax liability on the assumption that the Inland Revenue agrees with the value of the founder shares. You should consult your professional adviser.