SJ writes: I am on the board of a wholesale trading company. A few years ago we bought 85% of another business, which we trade as a group subsidiary. The remaining 15% is held by the subsidiary’s operations director, who has continued to run it. We would like him to join the group board and exchange his 15% shareholding in the subsidiary for a shareholding in the group. Is this going to be easy?

The key issue will be the value of the shares in the subsidiary and the value of the shares you are proposing to grant the operations director in the holding company, writes Chris Lane, a partner in Kingston Smith LLP. If the value of the shareholding in the subsidiary is the same as the value of the shares in the holding company, there will be no tax consequences. Problems arise if there is a shift in value either to the new director or from him.

If HM Revenue & Customs (HMRC) thinks that the value of the shares in the holding company is higher than the shareholding in the subsidiary, it will seek to tax the additional value as additional earnings on the individual. In other words, the gain will be taxed as income at the operation director’s marginal rate of tax, which is probably 40%.

Alternatively HMRC could assess the existing shareholders for capital gains tax (CGT) on the capital disposal. This is complex but will broadly be calculated on the reduction in value of their holding (the maximum CGT would be 18%). HMRC is unlikely to use this route, though, if it can assess the operations director for income tax.

If the value shift is the other way round — towards the holding company — then the same points would be relevant, but in reverse.

In other words, the potential income-tax charge would be on the existing shareholders of the group and the disposal would be by the subsidiary director.

It is essential that you begin by making a valuation of both companies and then, subject to everyone’s agreement, issue the new shares. It is not generally possible to agree the valuations with HMRC beforehand.