Tax Regulations on Shares and Share Options for an Employee in a Register Limited Company UK including the Tax Efficient SAYE Share Option Schemes and Company Share Option Plans (CSOP)


04 Jan

The rules for share options and share incentives not only prove as a tax efficient means for the remuneration of employees but also provide a link between remuneration and the performance of a company having Ltd UK registration. These rules related to shares will be the focus of the blog and different tax efficient schemes for shares will also be considered.

Shares and Share Options for an Employee

There is a possibility of the occurrence of a charge of tax in the case where the share options or the shares are provided to the employee outside the schemes (i.e. approved schemes).

The inclusion of shares and share options may be done by an employer as a part of an incentive package whose offer is made to the employees. Described below is the scenario in which a charge of tax may occur (the charge does not occur if they fall within the special schemes that provide tax reliefs).

Ownership of Shares

In an employing company having Ltd UK registration a charge of tax may arise if some shares are owned:

  • If the employee or the director acquire some shares, or they buy the shares at a value less than the market value, then there is a charge on the difference between the amount and the market value whose payment is made by the employee or the director for the shares.
  • If there is an occurrence of a chargeable event while the employee or the director still has a beneficial interest in the shares, then there is a charge upon the increment of value of interest caused by the chargeable event in the form of particular employment income. A chargeable event is said to have occurred when a change of rights or restrictions in relation with the shares considered or to other shares result in the increment of the value of shares. Also, it is said to have taken place when the concerned person is an employee or a director of a set up company London (or UK) or an associated. However, in the case where the charge is applicable to all the similar class shares, then generally it is not labeled as a chargeable event.
  • If an employee acquires the shares due to the fact that he/she is an employee or a director of the company, and because of this ownership of the shares, they get a special benefit, their taxation is done in the form of specific employment income unless the benefit’s availability can be used by at least 90% of the shareholders of the same class or the company’s control is in the hands of employees by virtue of holding the shares under same class.
  • There is no income tax charge upon the acquisition of the shares in the case if the director or the employee acquire shares whose fortification can be done later. Upon the lifting of risk of forfeiture, or upon the sale of shares, then there is a charge of income tax. The calculation of the specific amount of employment income can be done by finding the difference between the shares ’market value and subtracting the cost of the shares.
  • If the received shares as a result of employment are converted subsequently to shares of another class, then there is a charge of income tax on conversion on the difference between the market value and the price of shares.

What are the share options?

Generally, there is no charge of income tax if an employee or a director gets an option to obtain shares (i.e. they get a right to purchase the shares at a future date according to the price set today). Secondly, upon the exercise of an option, there is a charge in the form of specific employment income on the shares market value after the date of exercise subtracting the sum of anything paid for the option and for the shares. If there is an assignment or release of the option for money, or an agreement is done for not exercising it, or someone else gets a right to obtain the shares, they are taxable likewise on the amount they acquire minus the paid amount for the option.

Tax Efficient Share Schemes

There exist a number of schemes for shares that are tax efficient in nature, approved by the HM Revenue and Customs, according to which an employer having register limited company UK is able to provide employees with a stake in the business.

The recognition of the requirement to encourage schemes is done by the successive governments. This helps in broadening the ownership of shares among employees or reward personnel. There are a number of tax efficient schemes. There are four types of share schemes that are approved:

  • SAYE share option schemes
  • Company share option plans (CSOP)
  • Enterprise Management Incentives (EMI)
  • Share Incentive Plans (SIPs)

The SIPs include the employees who are given shares while the other three include the share options.

The rules for the governance of these schemes are described below:

  • How does the operation of the scheme take place?
  • Implications of taxation in the case of selling the shares. In general, the only charge of tax occurs when the selling of shares is done at a gain and the charge is to capital gains tax instead of national insurance and income tax
  • The scheme conditions; There is a variation in the conditions required by each scheme but they may relate to the set up company London or UK that is responsible for the operation of the scheme, the employees talking part in the scheme, the issuance of shares, and the cost at which the exercise of options can be done. In certain cases, some specific limits of time should be met. For example, the options or the shares should be held for a specific period
  • Price of setting up the scheme; The subtractions available for the company in operation are also considered

SAYE Schemes of Share Option

A share option scheme named as the SAYE Scheme (save as you earn) lets the employees to save monthly amounts at a regular basis for a defined duration and make use of the funds to consider the options to purchase shares free of the charge of income tax and NIC. As a substitute, they can simply take the saved cash.

Operation of the Scheme

A scheme can be set up by an employer having company registration UK that should be open to all the employees and the full time directors, according to which the employees have a choice to make monthly investments at a regular basis in special bank or building society accounts called share save accounts. A fixed monthly amount between £5 and £250 can be saved by the employees. The duration for making the investments is 3 to 5 years, and then an addition of a tax-free bonus is done to the account by making use of interest. The money can be acquired in the form of cash by the employee on the withdrawal date. In an alternate way, they may leave the money in the scheme for a duration of another two years in which case the addition of another tax-free bonus takes place.

Alternatively, the employee may make use of the money in order to purchase the ordinary shares in their employment company or its holding company, according to the granted options when the employee started saving in the account. The cost of these shares is fixed by the option and should be at least 80% of the market value at the date of granting the option.

Implications of Tax of Grant and Exercising the Options

There is no charge of national insurance or the income tax when:

  • The grant of options is done (i.e. when the employee starts to save in the scheme).
  • The employee is involved in saving money in the scheme, specifically the bonus given through interest is free from the charge of tax.
  • The exercise of the options takes place.
  • The employee makes a decision of not purchasing the shares but to rather withdraw the money.

Implications of Tax upon the Sale of Shares

When the shares obtained under the scheme of SAYE are sold out, no contributions of national insurance or the income tax needs to be paid.

Once the sale of the shares is made, any gain is subject to the capital gains tax (CGT). The cost in the calculation of gain is the value that was paid by the employee for the shares.

Conditions for the Schemes of SAYE

In order to acquire the approval from the HM Revenue and Customs (HMRC), a scheme should be open to all full time directors and employees, and on similar terms. The inclusion of part time directors can also be done, but they can also be excluded. However, the imposition of a minimum qualifying period of employment of up to five years may be done, and there can be differences dependent on the length of service or remuneration.

Prices for Setting up Schemes of SAYE

If the condition is fulfilled that the approval of scheme is obtained within nine months of the termination of the accounting period, then the costs of setting up a scheme of SAYE suffered by a company are to be subtracted in the accounting period in which they are suffered.

Company Share Option Plans (CSOP)

Under the option of the company share option plans (CSOP), there is no NIC or income tax charge. Also, there is not any NIC or income tax charge on an exercise that takes place between three and ten years after the grant. Only CGT will be applicable to the profit when the shares are disposed of.

How does the operation of scheme take place?

According to the scheme of CSOP, that can be restricted to selected full time directors and employees, an employee gets the choice to purchase shares. The exercise of options may be done between the duration of three and ten years since the grant, in order to achieve the treatment of beneficial tax. An employee can get options over shares up to the amount of £30,000.

Implications of Tax of Grant and Exercising the Options

There is no charge of national insurance or income tax on the grant of an option under a CSOP, nor on a profit that occurs as a result of exercising an option according to a CSOP between a duration of three and ten years after the grant. In the case when the exercise takes place earlier than 3 years and later than 10 years after the grant, then the loss of exemption of tax takes place.

The waiting period of three years is not applicable when the options of a deceased employee are exercised by the personal representatives within the duration of 12 months of death (but the rule of ten years still remains applicable).

In case of the exercise of options before three years after the grant, the options will be exempt from tax if the exercise and exit from the scheme occurs due to some specific circumstances that include pause in employment because of an injury, redundancy, disability or retirement of the employee and also when the company’s cash takeover results in a forced exercise of the options.

Implications of Tax upon the Sale of Shares

There are no consequences in regard of the income tax and national insurance, when the shares are sold out that were once acquired under the CSOP.

When the sale of shares is made, any gain becomes subject to the capital gains tax (CGT). The cost in the calculation of gain is the value that was paid by the employee for the acquisition of shares.

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