Giving shares to directors and employees
A company can issue shares to a director or employees. However, whenever you are giving shares to directors and employees you need to be aware of HMRC's taxing provisions for Employment Related Securities.
What are employment related securities?
Whilst we've discussed giving shares to family members in a previous post here, the employment related securities rules are more relevant where you are giving shares to directors and employees who are not family members.
The rules potentially apply to share options, shares and other types of security such as loan stock and bonds, whether convertible into something else or not. This post will focus on shares given to directors and employees. We'll cover share options in a separate post at a later date.
The tax charge is triggered when securities are issued to prospective, current or former directors or employees of a company and apply to companies of all sizes.
Additionally, the following points should be considered:
How is the tax charge calculated?
Directors or employees are subject to Income Tax on the value of the shares awarded (less any amounts paid). They are taxed as earnings from employment. Therefore any tax liability will be payable at the individual's marginal rate of income tax.
Shares are valued on the money's worth principle at market value for Capital Gains Tax purposes. If they are considered to be readily convertible assets the taxable value of the shares will be subject to PAYE and reportable to HMRC accordingly.
The situation is slightly more complicated where shares are awarded in an unlisted private company. This is because the value is reported on an individual's tax return. It is therefore important to have a credible value of the company at the time of any shares are transferred.
Any income tax liability is payable under Self Assessment by 31 January following the tax year of the award. So for example a tax liability on a share award made in the 2022/23 tax year would be due on 31 January 2024.
Shares with varying rights or restrictions
An additional Income Tax liability in certain situations where the rights attaching to a share vary and can change its market value. Examples of this are as follows:
In order to avoid a later tax charge, both the employer and employee may make a joint election. As a result of the election the director or employee will pay income tax on the market value of the shares without the restrictions in place.
Whilst the election does not need to be submitted to HMRC a copy needs to be held internally and must be made within 14 days of the date of acquisition of the shares.
Whilst making an election on acquisition may not be problematic for an employee working in a start up with a relatively low value, it could be an issue for an employee in an established business. The employee could be forced to pay too much tax upfront when there is no subsequent increase in value of the company or be forced to sell the shares at par or less than the amount taxed upon the original acquisition.
It's possible to mitigate the effects of the Employment Related Securities legislation by the use of freezer shares or tax favoured share option schemes and we'll discuss this in a separate article.
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