Transfer of shares at Zero consideration and Capital Gains Tax event

My question is unrelated to property development but rather related to a micro unlisted start up business that’s been running for just under 2 years and requires skills to expand.

The original founder (not related) wishes to take on a skilled professional (not related) because they have specific IP (intellectual property) knowledge that the founder of the start up business requires to move forward and succeed. This is not an ongoing employer/employee relationship between the founder and the skilled professional but only a short term less than one year situation and the start up does no have any type of ESS employee share scheme in place.

The founder has offered to renumerate the skilled professional for their IP through a transfer of a small parcle of their own shares at zero consideration from the founders own original larger block of unlisted shares rather than giving them cash payment and taking the long term view that the skilled professional will be able to cash out the shares in the start up if the skilled professional so chooses to do so in 2 years time when either an IPO or an off market private take over occurs of the start up business.

The unrelated skilled professional has not begun their work at the start up business yet.

Would the transfer of shares for zero consideration trigger any capital gains tax upon receipt of shares and if so is it the Founder who pays the CGT or does the Skilled Professional pay the CGT upon liquidation of the shares in around 2 years time. Or do they both pay some form of CGT now and in 2 years from now?

Thanks in advance.

NOTE: The shares were given to the original founder for free less than two years ago and are currently unlisted and held in private hands, the market value of the shares currently is not yet known but expected to be equal to what ever the enterprise is currently valued at after loans and liabilities.

 

Yes, the market substitution rule would apply so that the CGT would be assessed at market value of the shares - the transferor is the one who will pay the tax.

 

Thanks Terryw

 

They might want to look into employee share schemes as well.

 

If you do a valuation of the shares the market value might be quite low - remembering that you will take into account a discount for a minority interest.

You could consider partly paid shares being allotted to the employee with a limited recourse loan and options associated with the cessation of employment.

There are tax concessions associated with the transfer of business assets and that should be considered.