Issuing more shares

Diluting your shareholding?

There may be good reasons for issuing more shares in your UK limited company, but you may unwittingly be running the risk of a capital gains tax bill. Read on . . .

The typical situation is a small company headed by Fred Flintstone and Barney Rubble who each own 50 Ordinary shares. Fred and Barney then decide to admit Mr Stone as a third director to Dinosaur Ltd and want to give him a small share of the company. The aim is to split the shares in a 40:40:20 ratio. There are two ways to do this:

  • The simplest thing would be for Fred and Barney to sell or transfer 10 shares each.
  • Or, Dinosaur Ltd could issue a further 25 Ordinary shares from the unissued share capital.

In either case the desired ratio of 40:40:20 is achieved, and in either case a potential gain arises in the hands of Fred and Barney. This happens whether or not money (or other consideration) changes hands. The gain arises, because Fred and Barney have given up a chargeable asset. Whichever way you look at it, they have surrendered 10% each of Dinosaur Ltd to Mr Stone.

The capital gains tax calculation depends on many factors, particularly in the case of small, close companies (and you should take professional advice)! In it’s simplest form, look at it this way . . .

Let’s say that Dinosaur Ltd is worth £1M. That was the value of the company on the balance sheet when last year’s accounts were done. Let’s also assume that the year end was yesterday and that the accounts were completed this morning, and so that figure is a valid current market value. Let’s also assume that Mr Stone paid nothing for the shares and was given them only on account of his important status.

Fred put in £50 on day one of the company and has just given away shares which originally cost him just £10. Because Dinosaur Ltd is now worth £1M he has made a disposal to the value of £100,000. His capital gain is £99,990 and he has and annual exemption of (say) £9,990. That leaves £90,000 chargeable to tax at the prevailing rate.

  • In 2009/10 the CGT rate is 18%
  • So 90,000 x 18% = 16,200

Amazing isn’t it? Fred has to pay a tax bill of £16,200 even though he received nothing but Mr Stone’s important status in exchange for a 10% share of Dinosaur Ltd. Ditto Barney! There are narrow, specialised rules which may allow some form of tax relief from that gain. However, does this story have implications for any share transactions you are considering? If your proposed arrangement means that your percentage holding in a company is going to change then you should seek professional advice.

And even if your holding is going up, there are implications for (a) your next share transaction and for (b) whoever has a diluted share in the company as a result.

Lettings Accounts Checklist

We prepare individual summaries for each rental property. In the case of multiple properties the figures are combined for inclusion on a self assessment tax return. Please therefore prepare a separate set of records for each of your rental properties.

Where you have a mortgage on a property it is crucial that we have accurate details. All UK lenders issue a 5 April certificate or a 5 April mortgage statement precisely for the reason that your accountant will ask you for one. They know that these figures are required for self assessment.

If this information cannot be obtained, then we cannot prepare your lettings accounts and we cannot prepare your self assessment tax return. It’s as simple as that, no ifs, no buts, in the past we have lost clients over this issue, and that’s fine by us. You need a lender who is going to help you keep onside with tax law. If you’re not happy with your lender, complain to them, and then (if you have to) refer them to the Financial Ombudsman.

Please follow this guide carefully and let us have the information and the documentation detailed below. For self assessment purposes the tax year started on 6 April (more than one year ago) and ended on the 5 April which has recently passed.

Bank/Finance House items

• A copy of a loan interest paid certificate for the whole tax year.
• If the lender cannot provide a certificate, please let us a copy of a detailed analysis from your lender showing actual loan repayments made, stating clearly how much represents a repayment of capital and how much is a payment of interest.

Income items

Records of all rents received. That could be any one of the following:

• Copies of all rental invoices issued.
• Copies of all statements from your lettings agent.
• Other records which clearly show all monies received.

Expense items

Any combination of the following:

• All supplier invoices addressed to you as a landlord.
• Copies of all statements from your lettings agent.
• Other receipts and expense vouchers which support your other rental outgoings.
• Where documents are not available please let us have a note of the nature of the expense and the amounts paid. This should apply only in exceptional cases where (for example) the tenant has left and has taken the council tax bill, and you have had to pay some later instalments of council tax yourself.

If you are unsure about any of these points please feel free to call us.