There are a few tax risks involved with transferring shares between founders which should be carefully considered. Generally, when the company is at an early stage and the value of the shares is low, the risks can be relatively low, but as the company grows these risks increase.
It is worth noting that a company’s idea of “market value” for its shares can on occasion be different to HMRC’s idea of that value. If you are taking the view that the market value of the shares is zero, or very low, and therefore are hoping to avoid tax risks, then you should be careful to ensure that this is a reasonable position to take and ideally should take professional advice to back up this view.
Founders are usually employees and directors of the company, and as such there are a few employment tax risks which need to be considered – see “Employee shareholders – what are the risks?” for more details. Even though such a transfer is not likely to be made ‘by reason’ of the founder’s employment/directorship, HMRC regard founder shares as ‘employment related securities’ and so if a founder acquires shares in the company from any source at a price below the current market value, there is a risk of employment income tax charges arising.
In addition, the transfer of shares will be a CGT disposal. A gift or a transfer otherwise than on arms’ length terms is deemed to take place at market value for CGT and so the transferring shareholder may find there is a CGT liability on the transfer, depending on the value of the shares. An annual exemption from gains of £12,300 is currently available.
Generally speaking, we would discourage transfers of shares between founders (or even allotments of new shares to founders) unless true “market value” is being paid for those shares. There are likely to be other means of achieving the ultimate goal of the transfer and speaking with your legal advisors can help you find a suitable approach.