Let’s start with a stark fact: any activity where shares are created, sold, swapped or bought back will have tax consequences. So please remember that all share movements and options must be carefully planned from a tax perspective as well as a commercial perspective. Also, remember that share movements should also be considered in relation to legislation, articles of association, any subscriber or shareholder agreement, and even commercial documents relating to convertible loans etc.
Purchase and options schemes
The schemes fall into two categories:
– Approved schemes are framed by tax legislation (woo!) and can convey tax advantages to the purchaser. More on this below.
– Unapproved schemes are deemed to take place at the time of transfer at market value for the shares. Please note that the terminology here is ‘unapproved’, not ‘illegal’, as they are just share movements that don’t have specific tax advantages.
To gift a share is to sell at less than market value, or gift for nothing. The tax consequences here depend on whether the recipient is an employee or non-employee. For an employee, the scarily titled ‘employee related securities’ legislation will kick in, and the gift will in general be treated as a taxable benefit in kind. There is also the question of capital gains tax for the previous owner (if gifting existing shares).
For non-employees the EWRS rules won’t apply, but capital gains tax will. You may be able to apply for gift holdover relief… (a topic for another time) …and we also need to consider whether the parties are UK domiciled or not. Ouch, please chat to your advisor first.
Share purchasing is exactly that – ownership of shares changing hands, or new shares being issued. This could potentially dilute the ownership of existing shares, so talk to your advisor about how that might affect your voting rights and so on.
Share options are also how they sound! A grant is issued of an option to buy shares at a later date. These tend to have commercially-driven circumstances attached to them, such as a business sale.
A company may want to purchase its own shares. This is fine, but be aware of the hefty anti-avoidance rules around this, which exist to stop founders plundering the companies’ cash reserves on the cheap. Notwithstanding cash, sufficient reserves on the balance sheet must be available to fund the buy-back, and if not, then this is illegal. Also note that the purchase only becomes tax deductible to the company if it is for the purposes of the business. In the example of a departing founder (voluntary or otherwise), this is normally justifiable, but of course there are processes to follow.
Approved Share Transfer Schemes
So, now that we’ve covered some of the schemes, let’s look into the specifically approved schemes that are available.
Share Investment Plan (SIP)
This is a gift/purchase scheme, and non-discriminatory (the company sets it up for any employee to opt into). SIPs deal with low volumes and values of shares. The maximum value that can be gifted to the employee is £3,600, and they can purchase further shares to a value of £1,800. Dividends from the shares can be used to buy more shares, too. To avoid income tax on the gift of shares, they must be held for 5 years.
Save As You Earn (SAYE)
Another purchase scheme which is non-discriminatory. SAYE is generally suitable for larger corporates, and the employee can contribute a maximum of £500 a month on a 3 or 5 year contract. Shares will be subject to Capital Gains Tax (CGT) when sold, but there is no income tax on the difference between the purchase and market value.
Company Share Option Plan (CSOP)
This is an option scheme which is discriminatory (you can choose who is offered the options). Once the options are granted, the employee can purchase up to £30,000 of shares at a fixed price, exercised after 3 years. The price in this instance must be based on the market value at the time of granting the option, and no discounts are allowed.
Enterprise Management Incentive (EMI)
Another optional and discriminatory scheme, but with a lot more flexibility than the CSOP. As the cool kids (possibly) say, “it’s the Daddy!” The employee can be granted up to £250k of options, without income tax or national insurance providing that the options are exercised based on market value at the time of the grant. Entrepreneurs relief may be available upon sale of the shares, reducing potential CGT liabilities. EMI is by far the most attractive approved share transfer option, but consult your advisor on the myriad of detailed rules around it. Unfortunately, as of April 2018, EMI schemes fall under state aid rules and are currently suspended pending EU agreement on renewal of the scheme.
Remember that tax can be (and usually is) complicated. This blog is no substitute for a proper discussion about your individual needs. We cannot cover every detail of the rules or every scenario of this complex area in a blog post, but we’re always happy to have a chat over coffee! Ensure you take detailed professional advice before enacting any of the above schemes.
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