Best timing to issue shares?

[tbon]

Hi All,

My partner and I own a limited company, 50% each, by holding 1 share each (of value £1). Now, we want to change the ownership structure to 30%/70%, by issuing 2 and 6 more shares respectively. (I guess in this case this is the easiest way to change the ownership structure.)

My question: when is the best time to issue the new shares?

Things to (possibly) consider:

• Before or after the next confirmation statement review period? (company was formed 16/01/2023)
• Before or after the last day of the company's first financial year? (31 Jan)
• Does the value of the company on the day of issuing the shares matter in any way?

I guess none of these matter at all, but I would be happy to hear expert opinion, to avoid making it more complicated than necessary.

Thanks!
tbon

 

[NickZ]

In your case I'd go for 10. 000.000.000 shares and split those accordingly. Just in case you wish to go public.

Before the next confirmation statement review period.

 

[tbon]

Before the next confirmation statement review period.

Why do you think it's better to do it before?

 

[DontAsk]

What does your accountant say?

In your case I'd go for 10. 000.000.000 shares and split those accordingly. Just in case you wish to go public.

What's a 000.000.000 share, and why would you want 10 of them?

 

[NickZ]

What does your accountant say?

What's a 000.000.000 share, and why would you want 10 of them?

10.000.000.000 shares,
Makes me wonder? Do you people try to misinterpret everything I write?

 

[Joyous]

Does the value of the company on the day of issuing the shares matter in any way?

Do the shares currently have value? If so I strongly suggest you speak to either an accountant or a commercial solicitor before going ahead with this. You currently own 50% of a business. In making the shareholding 30:70 you're effectively disposing of 20% of the business. The shares are an asset and their value is dependent on the value of the business. Are you giving your partner the shares for free? Is he paying for them, if so how much?

Capital gains tax is the obvious thing that springs to my mind. Of course, if the company and therefore the shares are worth nothing then these are all moot points, but if the shares have value then you need to take advice.

 

[DontAsk]

10.000.000.000 shares,

That would be 10,000,000,000

 

[tbon]

Thanks for your contributions, guys. It's been very insightful.

 

[fisicx]

10.000.000.000 shares,
Makes me wonder? Do you people try to misinterpret everything I write?

Maybe it’s because that’s not a recognisable number in the UK.

 

[DontAsk]

10.000.000.000 shares,
Makes me wonder? Do you people try to misinterpret everything I write?

Never write anything that can be interpreted. Always write something that cannot be misinterpreted.

 

[NickZ]

You can interprete even a yes or no.
nature.com/articles/s41599-023-01760-5

We all have differences in views, look at the half full glass and half empty glass. And that are only 2 facets of human opinions.

 

[fisicx]

We all have differences in views, look at the half full glass and half empty glass. And that are only 2 facets of human opinions.

Yes but if you post on a UK business forum using a number format that isn’t recognise you can expect some pushback.

 

[JEREMY HAWKE]

Yes but if you post on a UK business forum using a number format that isn’t recognise you can expect some pushback.

Maybe he is one of those disrupters or maybe even an instatok creator or something

 

[NicoJ]

Do the shares currently have value? If so I strongly suggest you speak to either an accountant or a commercial solicitor before going ahead with this. You currently own 50% of a business. In making the shareholding 30:70 you're effectively disposing of 20% of the business. The shares are an asset and their value is dependent on the value of the business. Are you giving your partner the shares for free? Is he paying for them, if so how much?

Capital gains tax is the obvious thing that springs to my mind. Of course, if the company and therefore the shares are worth nothing then these are all moot points, but if the shares have value then you need to take advice.

They are not disposing of anything so I'm not sure why CGT would be in play here?

To answer the questions:
*You can do a confirmation statement whenever you want, my advice would be to submit a statement following the issue of shares (which would require CH paperwork in itself IIRC).
*Doesn't really matter, what matters is when you want to allocate dividends
*Yes.

As others have said the best advice here is to consult an accountant to help with the right solution for you and your circumstances.

 

[Chris Ashdown]

Giving away shares when a new company costs little as they have little value, but if the company grows as you imagine then each share could be very valuable and even worth millions

At 50/50% neither shareholder has the ability to get rid of each partner where as 70/30 gives a lot of potential power to the largest shareholder especially if you fall out

The other thing is do you have a SHAREHOLDERS AGREEMENT which needs to be drawn up by a solicitor, I recommend you look up shareholders agreements and fully understand the pitfalls of not having one or having just a off the shelf one without legal advice

 

[Joyous]

They are not disposing of anything so I'm not sure why CGT would be in play here?

We don't know the value of the shares. If the company has a successful trading history the shares might have considerable value. It is the disposal of these shares that potentially give rise to a capital gain.

 

[NicoJ]

We don't know the value of the shares. If the company has a successful trading history the shares might have considerable value. It is the disposal of these shares that potentially give rise to a capital gain.

But there is no disposal. At the moment each has 1 share, after the issue of shares 1 has 3 shares, 1 has 7 shares. Neither have disposed of or transferred any of their shareholding.

 

[Joyous]

But there is no disposal. At the moment each has 1 share, after the issue of shares 1 has 3 shares, 1 has 7 shares. Neither have disposed of or transferred any of their shareholding.

He's disposing of his share of the company. It's currently 50:50 with plans to be 30:70. He's disposing of 20% of the company. The shares are just a representation of his holding.

The same as if they had 5 shares each and he handed over 2 to his partner. All they're proposing to do is dilute the shares and redistribute them.

 

[Newchodge]

You can interprete even a yes or no.
nature.com/articles/s41599-023-01760-5

We all have differences in views, look at the half full glass and half empty glass. And that are only 2 facets of human opinions.

Why do you suggest 10 billion shares?

 

[NicoJ]

He's disposing of his share of the company. It's currently 50:50 with plans to be 30:70. He's disposing of 20% of the company. The shares are just a representation of his holding.

The same as if they had 5 shares each and he handed over 2 to his partner. All they're proposing to do is dilute the shares and redistribute them.

Issuing new shares does not equal disposal.

 

[Argentum Tax]

Issuing new shares does not equal disposal.

It does if it changes the ownership by dilution/redistribution of shares. @Joyous is quite correct In what she says.

 

[Joyous]

Issuing new shares does not equal disposal.

To keep the numbers simple imagine the company is worth £100. Shareholding is split 50:50 so each share holder holds 1 share worth £50.

They now want the company split 30:70. You cannot physically split one share so you issue new shares to get the desired split. 8 more shares are issued so there are now 10 shares in total. Company is still worth £100 so each share is worth £10.

The value of OP's shareholding falls from £50 to £30, hence the 20% disposal.

 

[NickZ]

In your case I'd go for 10. 000.000.000 shares and split those accordingly. Just in case you wish to go public.

That is the origen of the post loved by interpreters.

Why do you suggest 10 billion shares?

 

[Newchodge]

That is the origen of the post loved by interpreters.

So, why do you suggest 10 billion shares?

 

[NickZ]

So, why do you suggest 10 billion shares?

Just in case you wish to go public.

 

[Newchodge]

Just in case you wish to go public.

Unbelievable.

 

[NickZ]

Unbelievable.

What's so unbelievable?
Look at Microsoft, Alphabet.

 

[Newchodge]

What's so unbelievable?
Look at Microsoft, Alphabet.

Where are the 2 shareholders in this company going to get the £5 billion each that is needed?

 

[NicoJ]

To keep the numbers simple imagine the company is worth £100. Shareholding is split 50:50 so each share holder holds 1 share worth £50.

They now want the company split 30:70. You cannot physically split one share so you issue new shares to get the desired split. 8 more shares are issued so there are now 10 shares in total. Company is still worth £100 so each share is worth £10.

The value of OP's shareholding falls from £50 to £30, hence the 20% disposal.

The value of the share is £50 so issuing new shares makes the share capital (the worth of the company) £500 not £100?

I don't understand why there would be any CGT implications in this transaction, but I would advise accountancy advice as per my post above.

 

[Joyous]

The value of the share is £50 so issuing new shares makes the share capital (the worth of the company) £500 not £100?

No. It is the company that determines the value of the shares - not the shares that determine the value of the company. Issuing more shares doesn't suddenly make the company worth more, it just makes each share worth less.

If you have a cake that has been cut in half, cutting it into 10 doesn't give you more cake, it just makes each slice smaller.

 

[NicoJ]

No. It is the company that determines the value of the shares - not the shares that determine the value of the company. Issuing more shares doesn't suddenly make the company worth more, it just makes each share worth less.

If you have a cake that has been cut in half, cutting it into 10 doesn't give you more cake, it just makes each slice smaller.

If I issue 10 shares @ £1 each my share capital is £10. If I issue 10 more shares @ £1 my share capital is £20.

In your analogy I'm not cutting the cake, I'm adding more cake!

I did ask a question but neither you nor @Argentum Tax have given me an answer that makes sense. Its quite possible I'm wrong, if I am please give me the legislation?

 

[Joyous]

if I am please give me the legislation?

It's not a matter of legislation it's basic common sense.

If Mr A and Mrs B have a company with a bank account of £50,000 and fixed assets worth £50,000 then, assuming nothing else, the value of the company is £100,000. Mr A and Mrs B each hold 1 share. The value of the shares is determined by the value of the company so each share is worth £50,000.

Mr A wants to retire and have only a 30% stake. He cannot break off part of his one share to give to Mrs B so they issue more shares so that Mr A holds 3 and Mrs B holds 7.

The company still has a £50,000 bank account and £50,000 worth of assets so it is still worth £100,000. There are now 10 shares in issue so each share is worth £10,000 Issuing more shares hasn't suddenly increased the value of the company. All it has done is reduce the value of each individual share.

 

[NicoJ]

It's not a matter of legislation it's basic common sense.

If Mr A and Mrs B have a company with a bank account of £50,000 and fixed assets worth £50,000 then, assuming nothing else, the value of the company is £100,000. Mr A and Mrs B each hold 1 share. The value of the shares is determined by the value of the company so each share is worth £50,000.

Mr A wants to retire and have only a 30% stake. He cannot break off part of his one share to give to Mrs B so they issue more shares so that Mr A holds 3 and Mrs B holds 7.

The company still has a £50,000 bank account and £50,000 worth of assets so it is still worth £100,000. There are now 10 shares in issue so each share is worth £10,000 Issuing more shares hasn't suddenly increased the value of the company. All it has done is reduce the value of each individual share.

You can change the designation of a share - changing £1 to £0.01 for example.

In your example though if the value is £50,000 then the issue of shares would mean an additional £400,000 (8*£50,000) on the balance sheet either in cash at bank or unpaid share capital and the increase in share capital plus share premium. What am I missing?

 

[Argentum Tax]

If I issue 10 shares @ £1 each my share capital is £10. If I issue 10 more shares @ £1 my share capital is £20.

In your analogy I'm not cutting the cake, I'm adding more cake!

I did ask a question but neither you nor @Argentum Tax have given me an answer that makes sense. Its quite possible I'm wrong, if I am please give me the legislation?

@NicoJ
Well if you are interested you should do your own research.

What I will say is that the transaction suggested by @tbon would likely be subject to challenge by HMRC as being caught by the ‘value shifting’ provisions in TCGA 1992 ss 29-31 (subject, of course, to the transaction being significant). Any failure to properly declare the transaction on the relevant Tax Return would be seen by HMRC as a failure probably giving rise to HMRC formal enquiries.

 

[NicoJ]

@NicoJ
Well if you are interested you should do your own research.

I don't care, I was merely interested so I asked a question. If you don't want to explain that's your prerogative. I shan't lose sleep.

What I will say is that the transaction suggested by @tbon would likely be subject to challenge by HMRC as being caught by the ‘value shifting’ provisions in TCGA 1992 ss 29-31 (subject, of course, to the transaction being significant). Any failure to properly declare the transaction on the relevant Tax Return would be seen by HMRC as a failure probably giving rise to HMRC formal enquiries.

That's a spurious leap with the sparse details supplied.

 

[Argentum Tax]

I don't care, I was merely interested so I asked a question. If you don't want to explain that's your prerogative. I shan't lose sleep.

That's a spurious leap with the sparse details supplied.

@NicoJ
It was you who asked me to give you the legislation!
At least you could be gracious in defeat lol
?

 

[NicoJ]

@NicoJ
It was you who asked me to give you the legislation!
At least you could be gracious in defeat lol
?

And how have you "defeated" me? I'm not issuing shares, the OP is. Why would I want to research why somebody else thinks it may have CGT on it?
Isn't this forum supposed to help people? If you know you are correct then why wouldn't you prove it?

I am out of this conversation.

 

[Argentum Tax]

????

 

[Joyous]

In your example though if the value is £50,000 then the issue of shares would mean an additional £400,000 (8*£50,000) on the balance sheet either in cash at bank or unpaid share capital

Only if the purpose of issuing shares was to raise capital. In this case they are not looking to raise capital, they're simply looking to change the ownership ratio. There will be no influx of cash to increase the company's value, they'll just submit a load of paperwork to Companies House to achieve the desired result.

The value of the company will not change, Mr A will just have given part of his holding to Mrs B hence the disposal.

(Drops microphone and leaves the stage...)

 

[WaveJumper]

I love share splits