Tax liabilities when being offered equity in a trading company

Hi,

I am looking for a bit if advice and general knowledge before I go to an accountant about this.

I have been offered equity and a shareholder agreement in a company that is already trading. I have been told that this will incur a tax liability. Does anyone know what this might look like?

To give an example with simple round numbers if the firm has been valued at £1m and I’ve been offered 10% do I pay tax on that 10% valuation even though it is thereotical? Or do I pay it based on the amount if £££ passing through the books? Is it on turnover or profit?

I am excellent at what I do (hence the offer to join and grow) but not brilliant on the business side of things, hence the questions!…

Best to see an accountant and make sure you get this right or it could be very expensive For both you and the company when you sell the shares in the future.

It’s complex and can be a minefield.

If the company is worth 1 million and you buy 10% then if you pay 100 K then there shouldn’t be a tax liability on you or the company as you’ve paid market value. If you pay £90k there is tax/ni on £10k (the underpayment) + as you’ve underpaid 90/100 of future gains taxed at income rates plus NI (employer and employee).

However, you need to be careful about how any restrictions in connection with your shareholding impact valuation and how much you pay should pay for the shares.

You will definitely want to enter into a section 431 election to protect you and the company against possibly penal tax charges when you come to sell the shares assuming you make a gain. The 431 election fixes the income tax charges to any “gain” when you buy the shares not when you sell.

If no one mentions s431 elections find another advisor.

Thanks, texwade That’s really helpful. Will do more research in s431.

I imagine if I am given the entire (hypothetical) 10%, then there would be an even larger tax bill? Which would be tax (and NI?) So would we looking at 20% tax and 13.5% employer NI?

I guess that the s431 will protect against additional an increase in tax against the original amount so if share rise in value the tax does not?

If you don’t pay anything for the 10% then its an income tax charge on the £100k (prob 40%- 60% (tax allowance tapered away on income over £100k)  for you as £100k shifts into higher tax bracket + Employee and Employer NI so easily >50%. The S431 election protects against similar income tax charges on growth in value of shares (which can be eyewatering if say you share value grows to £1m say). If not handled properly you can get a very large Day 1 cash tax liability (+ no cash to pay it) plus a penal income tax charge on sale (instead of – for now – lower CGT) – for both you and the company. Pretty well all the upside could disappear in taxes.

Share schemes not my day job so get advice – a google of s431 showed a few sites which explain it better.

Thanks Texwade, I am getting proper help, but you have at least lifted some of the fog for me!