Selling company shares

Introduction

When an individual sells some of their company shares to another person, and new capital is also introduced into the company, the double-entry bookkeeping must accurately reflect both transactions. Below are the steps and corresponding entries for each scenario:

Scenario 1: Sale of Existing Shares

When an existing shareholder sells some of their shares to another person, this transaction occurs between the two individuals and does not directly affect the company’s books.

Cash Receipt by the Selling Shareholder

• Debit: Bank Account of the Selling Shareholder
• Credit: Shares (Equity Investment) of the Selling Shareholder

Since this transaction does not affect the company’s balance sheet, there are no entries in the company’s books.

Scenario 2: Introduction of New Capital by Issuing New Shares

When the company issues new shares to introduce new capital, this transaction affects the company’s balance sheet.

Cash Receipt from the New Shareholder

• Debit: Cash (Bank Account)
• Credit: Share Capital Account
• Credit: Share Premium Account (if shares are issued at a price above their nominal value)

Example

Let’s assume the company issues 1,000 new shares with a nominal value of £1 each at a price of £5 each to the new shareholder.

Journal Entries for Issuing New Shares

1. Cash Receipt:
   • Debit: Cash (Bank Account) £5,000
   • This represents the cash received from the new shareholder for the new shares issued.
2. Share Capital:
   • Credit: Share Capital Account £1,000 (1,000 shares * £1)
   • This represents the nominal value of the new shares issued.
3. Share Premium:
   • Credit: Share Premium Account £4,000 (1,000 shares * (£5 – £1))
   • This represents the amount received above the nominal value of the shares.

Tax Implications

The tax implications for the scenarios depend on the nature of the transactions and the parties involved.

Scenario 1: Sale of Existing Shares

Shareholder’s Perspective

1. Capital Gains Tax (CGT):
   • The selling shareholder may be liable to CGT on any gains made from the sale of their shares. The gain is calculated as the difference between the sale price and the original purchase price (plus any allowable costs).
   • There may be reliefs available, such as the annual exempt amount or Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which could reduce the CGT liability.
2. Stamp Duty:
   • The purchaser of the shares may be liable to pay Stamp Duty at a rate of 0.5% on the transaction if the value of the shares exceeds £1,000.

Company’s Perspective

• There are no direct tax implications for the company as this is a private transaction between shareholders and does not affect the company’s financial position or taxable income.

Scenario 2: Introduction of New Capital by Issuing New Shares

Company’s Perspective

1. Corporation Tax:
   • The introduction of new capital does not directly affect the company’s Corporation Tax position as it is an equity transaction, not a revenue transaction.
2. Stamp Duty:
   • Generally, the issuance of new shares by the company is not subject to Stamp Duty. However, if the shares are issued as part of a scheme to avoid tax, HMRC may subsequently challenge this. Therefore, it is important for companies to ensure that their share issuance processes are transparent and compliant with tax regulations. Additionally, companies should seek professional advice to mitigate the risk of any potential challenges from HMRC.

Shareholder’s Perspective

• The new shareholder may not have immediate tax implications upon purchase. However, future dividends received, or capital gains realized upon the sale of these shares could subsequently be subject to Income Tax and CGT, respectively. Therefore, it is essential for shareholders to plan accordingly. Additionally, consulting with a tax advisor can provide guidance on potential tax liabilities.

Advice and Planning:

1. • It is advisable for both the company and the shareholders to seek professional tax advice to understand the full implications. Consequently, this helps in planning efficiently for any tax liabilities. Moreover, having expert guidance can prevent unexpected tax issues. Additionally, it ensures compliance with current tax regulations, thus providing peace of mind for all parties involved.

Further information, can be obtained from the ,UK Government.

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