As in Ireland, there are a number of share option and share purchase schemes, which receive favourable tax treatment. They represent a means of rewarding and incentivising employees on a tax efficient basis. A share option is an offer to an employee of a right to purchase shares at a future date at an agreed term for fixed amount.
If share options are “unapproved” an income tax charge can arise on the difference between the market value at the date of exercise of the option and the cost i.e. the option price. It is deemed a benefit in kind. This tax applies at the date of exercise of the option. If the shares can be readily convertible into cash then National Insurance Contributions, may also be payable. When shares acquired under an unapproved option are disposed of, a further Capital Gains Tax charge may arise. The employment income taxable at the time of exercise is deducted.
Where the option is granted under an approved share option scheme no tax arises at the date of granting of the option or the exercise. Capital Gains Tax only applies at the time of actual disposal of the shares. The cost of the option and the cost of the shares are deducted. Non UK residents do not pay Capital Gains Tax. UK residents pay Capital Gains Tax of 18%.
There are four types of schemes which receive favourable treatment. Each must comply with certain conditions and be approved by HM Revenue and Customs
- SAYE Schemes
- Company share option plans
- Enterprise management initiative schemes
- Share incentive plans
Where shares are gifted to an employee or purchased at a discount price, the difference is subject to income tax and potentially National Insurance contribution.
A Save as You Earn (SAYE) allows employees to pay a maximum of £500 per month into a SAYE scheme for a period of 3 or 5 years (depending on the scheme design). At the end of the scheme period, the money can be used to exercise the share options.
No income tax arises on the grant of the option or on the exercise of the option i.e. the purchase of shares. CGT treatment only applies.
In order to qualify for approved by HMRC, a SAYE scheme all employees must be able to participate in the scheme on similar terms. The price is usually met by employees out of SAYE accumulated savings.
The price at which the shares are offered, must not be less than 80% of the market value of the shares, when the option was granted. Any employees owning more than 25% of the company are ineligible. The costs of setting up the scheme is allowable.
Approved Company Share Option Plan
Under this type of scheme, the company has greater discretion in allocating options. The aggregate value of the options is potentially greater than under SAYE.
Eligible employees must be either full time directors or full time or part time employees. Directors with a material interest of more than 25% are ineligible.
The option must be exercised between years 3 and 10. The price must not be materially less than their value at the time of the grant.
There is a £30,000 limit on the value of the shares which a participant may hold or on exercise at a time.
The costs of setting up the scheme are allowable as a tax deduction to the employer. Participation in the scheme need not be extended to all employees nor be on equal terms.
There is no income tax liability on the acquisition or disposal of shares under the scheme. Capital gains tax applies based on the difference between the sale proceeds and the cost of acquisition.
Enterprise and Management Scheme
The Enterprise and Management Scheme allows options to be granted to select employees in smaller companies. The rules are more generous than for share option plans. Options up to £250,000 can be granted to selected employees. Options taken under a company’s share option plan must also be taken into account.
Under this scheme, no Income Tax or National Insurance contributions are charged on the grant or exercise of the option provided the price was at least market value at that time.
If an exercise price was granted at a discount the charge is based on the difference between the market value at the date of the grant and exercise, if any. There are no limits to the number of employees who may benefit although the total value of options may not exceed £3,000,000.
An employee must work for the company at least 25 hours per week or at least 75% of his working time. If working less he must not have a material interest in the company i.e. more than 30%.
The company must be undertaking a qualifying trading company. Trades such as development are excluded. The Company’s gross assets must not exceed £30,000,000.
As of April 2018, the scheme is suspended for new cases, due to ongoing EU state aid rules issues.
Share Incentive Plans
Share Incentive plans allow employers to give shares to their employees, to purchase shares without an income tax charge. The sale of shares are subject to CGT.
There are a number of different mechanisms for a Share Incentive plan. An employer may give up to £3,600 in shares per year. The amount granted will usually depend on financial performance. Some or all may be linked to the employees achieving performance targets.
The employer may be allowed to buy partnership shares on a 1 to 2 basis i.e. two free shares for every one they buy. The cost is deducted from pre-tax salary to a maximum of 10% or £1,800 p/a. The employer may choose to issue further free shares on a 2 to 1 basis.
The plan must be available to all employees of a company or group employees. The employee must have no material interest in the company. There must be no arrangements for loans to employees. The free and matching plan shares, must be held for at least 3 years.
Shares usually exit the plan after the employee leaves. They may loose their free and matching shares if they leave within 3 years.
Dividends up to £1,500 p/a re tax free provided that they are reinvested in further shares in the company and held for at least three years.
If the shares are held for 3 years, there is no income tax or National Insurance liability on any increase in the value of the shares. Provided the shares are held for 5 years, there is no income tax or National Insurance liability on the shares at all.
Capital gains tax is charged on the disposal of the shares in the normal way. Employees are liable for CGT on the increase in value of the shares after they exit a plan.
There is a roll over relied for shareholders of certain small companies who sell their share to a share trust scheme for the benefit of employees.
Approved Profit sharing Scheme
The employer funds a scheme trustee who purchases shares which are held for employees. Provided the shares are held in the trust and retained for three years, there is no income tax liability when the shaes are retained for the employees.
The maximum that may be allocated to an employee is 10% of salary with a minimum and maximum limit of £3,000 and £8,000 respectively.
Employee shareholder shares
An employee shareholder must own shares in his employer’s company that were worth at least £2,000 on acquisition. They must be acquired under an agreement. The employer must pay for an independent expert to give advice about the terms and effects of the employee shareholder agreement. The employee must not be connected to the employer.
The employee does not usually pay Income Tax or National Insurance on the first £2,000 worth of employee shareholder shares acquired before 1 December 2016.
Before 17 March 2016 the employee only paid Capital Gains Tax on shares that were worth over £50,000 when acquired. After 17 March 2016, the employee only pays Capital Gains Tax on gains over £100,000 made during his lifetime
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