More and more companies now give their team the opportunity to acquire company shares. If correctly structured, this can be a very tax efficient way of attracting and retaining new team members, as they are able to share in the success of the company.
The issue of shares to an employee must be reported to HMRC using Form 42 by 6 July following the end of the tax year. There are a number of schemes that you could consider where the receipt of the shares will not be taxed as employment income and, in some cases, will only be subject to capital gains tax when the shares are eventually sold. Employers are required to “self certify” that the share scheme they have chosen complies with current legislation. Here are two schemes that could work for your company:
ENTERPRISE MANAGEMENT INCENTIVES (EMI) SHARE OPTION SCHEME
The best employee share option scheme currently available is the EMI share option scheme. In order to take advantage of this, both the company and employees must meet certain conditions:
- Must carry on a qualifying trading activity.
- Must have a gross asset value of no more than £30million.
The employee (or director):-
- Must work at least 25 hours a week for the company.
- Must not hold more than 30% of the company’s shares at the time that the EMI options are granted.
The main tax advantages of EMI share options are, that provided the option price is set at the correct value, there would be no income tax or national insurance when the option is granted or exercised. Furthermore, the employee will then usually benefit from CGT entrepreneurs’ relief which provides a 10% rate when the shares acquired under the option are eventually sold, such as on the sale of the business.
CORPORATION TAX RELIEF FOR EMPLOYEE SHARES
A further tax advantage of allowing employees to acquire shares in the company is that the employing company may be entitled to a corporation tax deduction. This deduction is the difference between the amount payable by the employee and the market value of those shares at the time they are acquired. This will generally be the amount taxable on the employee so, for example, if the employee pays £1 a share when the shares are worth £10 each then the £9 per share discount will be deductible for the company.
HOW DO I CHOOSE THE RIGHT SCHEME FOR MY COMPANY?
We can assist you by giving you further detailed information about the schemes available and how to implement them in your company. If you get things wrong there can be significant tax charges for the employee and employer. As a general rule, if employees are allowed to acquire shares at less than market value, the discount is taxable as employment income and PAYE; national insurance may also be due. So, for example, where the employee pays just £1 for a share worth £10, the £9 difference would be taxable.
If you would like to discuss giving shares in your company to your team, call Simon Chaplin on 01733 372682 or email him at: firstname.lastname@example.org