- If you are a director or existing shareholder
or the limited company here in the UK
and are thinking of& or just wanted to know
why and how to issue new shares to individuals,
then keep watching.
In this video,
we'll be covering the four most popular reasons
why you would want to issue new shares,
what exactly is an issuance of new shares,
and what tax needs to be considered when issuing new shares.
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(gently chiming bells)
Now, when we say why you would want to issue new shares,
it is in the context of you being a majority shareholder
and or a director with authority to issue new shares
on behalf of your limited company.
Whilst the following four reasons
are by no means exhaustive,
through a years of observation and experience
we have managed to distill the most popular triggers
of a new share issuance.
Number one is you want to issue shares
as an incentive to a new business partner
or co-founder who will bring crucial skills or assets
to the business to help it grow.
Number two, you want to issue shares to a spouse,
family member, or friend.
Number three,
you want to issue new shares to private or angel investors
in return for a monetary investment.
And number four,
you may want to issue new shares
as part of a share option scheme
to employees to incentivize and reward them.
In this video,
we're going to focus mainly on reasons one and two,
and we roadmap to do a video on reasons three and four
in the near future.
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(gently chiming bells)
Let's break this down with a simple example.
Bill incorporated his limited company, BB Limited,
on the 1st of January with 100 ordinary shares
at a normal value of one pound each.
In addition,
he started off with what is known as model articles.
These are basically the default articles of association,
in essence,
the company's constitution under the Companies Act of 2006.
So Bill is the sole 100% shareholder
and director of his new small limited company.
Business is going well, and 12 months later,
Bill wants to issue a gift of shares to John, his adult son,
in exchange for John's social media and marketing skills.
Bill decide to issue and gift John
50 of the same ordinary shares he holds,
all of one pound nominal value each.
Because Bill holds 100
of the current share stock of BB Limited,
the company will have to allot another 50 shares
that can then gifted to John.
By doing this,
the total share capital rises from 100 to 150.
And this in simplicity
is what is known as an issuance of new shares.
Bob's total shareholding has now been diluted to 66.6%,
and John owns 33.3% of BB Limited.
Now there is a process that needs to happen
in accordance with the Company's Act 2006
before an issuance is legally acceptable.
It's not just as easy as writing out an email
or verbally agreeing it with John,
they're all resolutions and forms to complete,
to name just a couple of steps.
We put together a step-by-step brief
on issuing your new shares
to help you understand the process.
Click on the link above to head to our website
and download it for free.
(gently chiming bells)
So continuing with our example of Bill gifting shares
to his son on behalf of BB Limited,
Bill issued 50 new shares
that were gifted to his adult son John,
who now owns 33.3% of BB limited
and is entitled to 33.3% of any declared dividends
as he holds a same class of ordinary shares
as the existing shareholder, Bill.
But gifting and receiving shares does not necessarily mean
either Bill or John can ignore tax implications.
After all,
if John had bought some shares for one pound
and went on to sell them for 50,000 pounds,
they would clearly be a capital gain
and thus potentially a capital gains tax implication.
Whether any capital gains materializes depends upon
the value of the shares that were gifted to John
and possibly some other factors.
Had the shares being gifted on day one,
so remember that was on the 1st of January
upon the corporation
when the company value was most probably zero,
then effectively capital gains tax would not be an issue.
However, let's say BB Limited was valued professionally
at a hundred thousand pounds
by the time John was gifted 33.3% of the company.
He now has inherited 33,333 pounds of value.
So the question of capital gains could arise.
But you may be asking,
John never paid anything for his shares,
they were gifted to him.
That is correct.
There was no consideration either by way of cash
or non-cash equivalents,
but HMRC in such instances
will always look at the deemed value of the gift
regardless of whether any consideration exchanged or not.
In other words,
what were the shares valued at the time of the gift?
Depending upon your circumstances and situation,
this can be a little tricky area of taxation.
So we always advise you seek professional advice
and assistance in this matter.
The main takeaway is that if there is a transfer of shares,
whether for monetary value or as a gift,
always think about getting advice
around any potential tax implications.
Now, the good news is,
if Bill had instigated the gift of shares
to his spouse or civil partner,
then this transfer would be exempt from capital gains tax
regardless of the value.
I hope this video has helped you gain a basic understanding
of issuing new shares and some of the tax considerations
here in the UK,
and taking you step closer to knowing your numbers.
As always,
let us know in the comments your thoughts on today's video,
or if there are any topics
you'd like to see us cover in the future.
Finally, be sure to like and subscribe
as this really does help us to get our content out there.
This is Tony Dhanjal for the Accounting and Tax Academy.
Thanks for tuning in.
(gently chiming bells)