Business Incorporations and Share Schemes

SECTION B: ADVISORY REPORT You are a tax advisor to Nexus Cyber-Security LLP ('Nexus'), a highly successful partnership owned equally by three partners: Alice, Bob, and Charlie. The LLP develops bespoke cybersecurity software for financial institutions. To attract external venture capital and incentivize key staff, the partners have decided to incorporate the business into a new limited company, 'Nexus Cyber Ltd', on 1 January 2025. The current market value of the LLP's assets is: - Goodwill: £3,000,000 (internally generated, nil base cost) - Freehold Office Building: £1,200,000 (original cost £500,000) - Cash at bank: £400,000 The partners are considering two incorporation routes: Route 1: Transfer all assets (except cash) to Nexus Cyber Ltd in exchange wholly for shares in the new company. Route 2: Transfer the Goodwill to Nexus Cyber Ltd in exchange for shares, but retain the Freehold Office Building outside the company, leasing it to Nexus Cyber Ltd on a commercial basis. Following incorporation, Nexus Cyber Ltd intends to implement an Enterprise Management Incentive (EMI) scheme to grant share options to five key software engineers. The company's gross assets post-incorporation will be under £5 million, and it will have 45 employees. REQUIREMENT: Prepare a report for the partners of Nexus Cyber-Security LLP advising on: (a) The Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) implications of Route 1 versus Route 2, specifically comparing Section 162 Incorporation Relief and Section 165 Gift Relief. Advise on the most tax-efficient route. (15 marks) (b) The qualifying conditions for the proposed EMI scheme and the Income Tax, National Insurance, and CGT benefits for the five key software engineers upon the grant, exercise, and eventual sale of the EMI shares. (10 marks)