I have a client who has enquired about using £100,000 of their existing £300,000 director’s loan to issue additional shares so that the balance sheet for the most recent accounts is solvent. The business has spent years developing and is recently starting to show good profits, and within the next 12 months should be solvent anyway. At this point, the client has suggested that the company can then buy back the additionally issued shares for £100,000. Is there any tax liability on the director on the issue of the shares and then on the buyback?
Arthur Weller replies:
Under normal circumstances, there is no tax liability on the director as a result of this ‘debt for equity swap’. And if the shares are later bought back by the company for £100,000, which is the amount paid for them, there will also be no tax liability for the director because they are not receiving back more for their shares than they paid for them. Just be careful about a scenario in which the company does not do well in the future. If the company buys back the director’s shares for £100,000, when actually their market value is less than £100,000, this would produce an income tax charge on the director, see HMRC’s Employment Income manual at EM21661.