The Chancellor of the Exchequer, Nadhim Zahawi, has been under pressure to explain whether £26m in unsecured loans received by himself and his wife from a family trust are, in fact, capital receipts that he should have declared for UK Capital Gains Tax. 

Mr Zahawi's family trust, Balshore Investments Ltd is based in Gibraltar, received money from the sale of shares in YouGov Plc, a company co-founded by Mr Zahawi in 2018. It then made £26m in loans to him and his wife in the UK to enable them to purchase property.

Mr Zahawi was a co-founder of YouGov Plc.

In May 2000, the company's three co-founding directors decided to allot themselves 828,180 Ordinary shares of 10 pence.

Two shareholders received 703,180 shares each of 10p in return for 'non-financial consideration' valued at £70,318.

Form 88(2) filed by the company says of the consideration for which the shares were allotted, "The nominal value of the shares reflects the value of the know-how, expertise and effort, which the allottees have in the opinion of the directors introduced into the company as of the date of allotment".

The company recognised intangible assets of £70,318 (accounting to the accounts the double entry accounting being Debit Intangible Assets £70,318 Credit Share capital £70,318).

A third founder, Neil Copp was allotted 125,020 shares, which he paid for in cash at a premium of £2.30. 

The total nominal value of the share capital was then reported as £82,822 on the company’s Annual Return, plus, according to the accounts filed later a share premium of £287,500 (as paid by Neil Copp)

Unlike his fellow founder, Stephen Shakespeare, Mr Zahawi, although a founder of the company appears to have chosen not to receive the shares personally. Instead, his family trust Balshore Investments Ltd, was allotted the founders allocation of 351,590 Ordinary shares of £0.10 valued at £35,159 (presumably because it was the one providing the “Know-how, expertise and effort” listed on the share allotment form, and Mr Zahawi, presumably did not provide any such skills as his role as a founder being something different).

In November 2002, it seems that someone realised that you cannot simply allot shares for 'know-how' and a new form 88(2) was filed. This was backdated to May 2000, the new return of allotments showing that Balshore Investments Ltd and Stephen Shakespeare were allotted 72,150 shares each in return for 10p for cash (i.e. the contributed £7,215 in cash each).

There were substantial numbers of share allotments by YouGov to many different parties over the years and more so once it become a PLC.

In April 2008 Stephan Shakespeare and Balshore Investments Limited and Nadhim Zahawi's spouse all sold a total of 5,500,000 Ordinary Shares of 0.2p each at £1.40 "in order to benefit from the change in Capital Gains Tax legislation effective on 6 April 2008". They reinvest their proceeds into the YouGovAlpha fund, as follows: Stephan Shakespeare 2,518,500 Balshore Investments Limited 2,518,500 Nadhim Zahawi's spouse 463,000. 

Fast forward to 2018, Balshore Investments Ltd sold the balance of its shares in YouGov for £26m. Being based offshore it would have presumably not been subject to CGT. It then made cash loans to Mr Nahawi and his wife in the UK of the same amount.

Analysis

The May 2000 allotment: don't try this at home!

It is unusual to allot shares in return for non-cash consideration. This is something that we see company founders often try as they want to be rewarded for their work on a start-up. If someone has been working for you as a director or employee and you give them shares at less than the market value of the shares, the consideration should be subject to PAYE/NICs. Alternatively, the shares allotted are all employment-related and so one would expect an Income Tax charge. In the YouGov Plc case, there also transfer of assets abroad implications, if you have effectively given your own know-how to an offshore trust which then uses that asset to avoid UK taxes.

It appears that someone spotted that the May 2000 allotment was a potential problem as the original allotment was corrected when a form 88(2) was refiled over two years later in November 2002 but back-dated. 

What about the offshore trust?

Which one? Mr Zahawi and his family have benefitted in the UK from some other £56m of loans from other offshore family trusts.

Regarding the transactions with an offshore trust, non-UK-domiciled individuals have long used the practice of building up tax-free income in offshore trusts and then drawing loans from the trusts in order to avoid making taxable remittances of income or capital into the UK.

The rules on remittances have changed over the years to make this type of planning less easy, however, this planning should be avoided if you have a settlor-interested trust, i.e. one where you happen to be both settlor and beneficiary of the trust. A potential issue with the offshore trust Balshore Investments Ltd is that Mr Zahawi may have acted as a settlor when allowing the trust to subscribe to his allocation of founder shares. This will depend on how you define a 'settlor'. His relationship with the trust is unclear.

Grand Prix boss Bernie Ecclestone has recently been caught out in similar circumstances. It's reported that he is under investigation in respect of his failure to declare to HMRC the existence of assets held overseas believed to be worth in excess of £400m. He placed his F1 shares offshore, also in a family trust and failed to declare CGT on his own tax return.

 

 


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