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Stock warrants
Tax implications of stock warrants paid to employee.
My client is a stockbroker raising finance for large listed companies. On occasion he is awarded warrants as a sort of commission in addition to his agreed fee.
The warrants allow shares to be purchased within a certain time limit at the share price prevailing on the date the warrant is issued. Therefore, if the share price goes up my client will probably purchase the shares and either retain them for a while or sell immediately. The warrants are not negotiated as part of the remuneration package but awarded for performance.
On the assumption that the market value of shares is £1 when the warrants are awarded and £2 when my client exercises the option to purchase at £1, my questions are:
- Is there a tax implication when the warrants are awarded – buying a share worth £1 for £1 now?
- If he buys at £1 and sells either immediately or in the future at £2 is the gain taxable as capital gains tax or income tax?
I look forward to replies from readers.
Query 19,919 – Mr Broker.
Corporation tax
Substantial shareholding exemption on company sale.
A small client company with a turnover of £400,000 (Tradeco), was sold last year to a larger, unconnected purchaser.
Before the sale, Tradeco was moved into a newly-incorporated Topco via a share-for-share exchange. This reorganisation took place only seven months before the sale completed. Topco sold the shares in Tradeco for consideration in cash, paid in full on completion, so the substantial shareholding exemption (SSE) was not available to the parent company. As a result, it now has a significant corporation tax liability.
The director was advised by us that SSE would not be available and there would be a corporation tax charge in Topco, but he decided he still wanted to go ahead with the deal for personal reasons. He has now asked us to see if there is a way to mitigate the tax charge.
As a further piece of context, the company had, for some years, maintained a bank deposit account which the director always referred to as the ‘holding account’. This he considered to be where profits were ‘squirreled away’, separate from the company’s trading assets. In essence, he used it like a holding company.
Obviously, the funds were not legally separated, but in his mind that is what he was trying to do. Therefore, putting the Topco in place, it could perhaps be argued, properly formalised this structure and would have been perceived by the director to be in place for some years. So, while the sale of the business was his decision and he knew the implications but still went ahead, the outcome does feel inequitable.
Do any readers think there is any possibility of obtaining SSE by challenging the 12-month holding requirement, which to me seems to be an arbitrary period of time intended to prevent abuse, or can anyone point me in the right direction if they’ve seen this scenario before?
Query 19,920 – Adviser.
Family company
Discount on minority holding in family property company.
An accountant in another practice with whom I used to work has advised me that, when valuing a minority holding in a family property company, the usual discount on minority holdings is not available, so that a holding of one third of the shares is worth a full one third of the value of the company.
I see no reason behind this, nor can I find any reference or support anywhere to this being the case.
As my adviser is usually well informed, could readers just set my mind at rest that I can set aside the advice given?
Query 19,921 – Toast.
Brexit complications
VAT on agricultural machinery sales.
I act for a client who buys and sells agricultural machinery, mainly to UK-based farmers.
First, it has come to light that my client has been issuing self-billed invoices to farmers when they trade in their old tractors and equipment for a new model. But my client has never shown the farmers’ VAT numbers on these invoices. Does this cause him an input tax problem?
Second, he has received an order from a UK business that needs a machine for their research centre in Austria. My client will buy the machine from his supplier in Italy and it will be shipped directly from Italy to Austria. What VAT complications does this create, particularly now that the UK is no longer part of the EU, which Italy and Austria are? Apparently my client’s customer does not have an Austrian VAT number because they only have a research centre in that country.
Readers’ thoughts would be appreciated.
Query 19,922 – Machine Man.
