Rewarding Your Key Employees – What are the Most Tax Efficient Share Schemes?
OverviewUnder the KEEP scheme, an employee will be given an option to acquire shares at a future date, at a fixed price which is the market value at date of grant. This allows the growth in value of the company shares between date of grant and date of exercise to not be taxable as a benefit in kind for the employee. KEEP applies to qualifying share options granted on or after 1 January 2018 and before 1 January 2024.
Taxation of KEEP sharesThe shares must be new ordinary fully paid-up shares which carry no present or future preferential rights regarding dividends, assets on winding up or redemption. The option price at the date of grant cannot be less than the market value of the shares at the date of grant and the option must be exercised within the period commencing 12 months after grant and ending 10 years later. The incentive associated with KEEP is that the uplift in market value from date of grant to date of exercise of the KEEP shares is not brought into the income tax net and will only be taxable on a future sale of the shares. The employee will pay Capital Gains Tax (“CGT”) on any future disposal of shares with the amount paid at the exercise date being the base cost of acquisition. 2. Growth Shares
OverviewGrowth shares are a very popular approach to reward one or more key employees who will be important to the future growth of the business. The shares are generally created as a new share class which allows the individual share in the future uplift in value of the company. A hurdle is set into the share class to only allow the individual share in value above that hurdle. When this hurdle is set at the market value on granting of the share, the value of the share should be minimal as all value is hope value.
Taxation of Growth SharesIncome Tax Once the shares are issued to the employee, PAYE would need to be operated on the market value of the share. However, if the employee pays the market value for the share no tax should arise. Given that a hurdle is included on the value of the share, this should decrease the current value being provided to the employee. Where the hurdle exceeds the current market value of the shares, it is likely that the value of the share is minimal, and no income tax would arise. Capital Gains Tax (CGT) If the shares are disposed of the gain will be subject to CGT. The base cost for the shares is the initial market value of the shares at the date they were awarded to the employee. Growth shares are a popular mechanism to ensure an employee is incentivised while also creating an efficient exit event from a tax perspective as the uplift will be subject to CGT rather than income tax. It can also be a more straight forward and simpler mechanism to implement than some of the more onerous share schemes. If you are looking to incentivise your employees through a share award you should talk to our tax team at Roberts Nathan to ensure you implement the most appropriate scheme for your needs.
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Share Option Schemes
Grant of Share Option SchemeThe granting of share options would not be subject to tax in Ireland provided the share option is not capable of being exercised more than seven years after the date on which it is granted. If it is capable of being exercised more than seven years after the date of it being granted, you will only pay tax if the option price is less than the market value of the shares at the grant date. The tax is due on the difference between the:
- market value of the shares on the grant date
- amount you pay when you exercise the option.
Exercise of Share Option SchemeOnce share options are exercised, an individual will be subject to Income Tax, USC and PRSI at a rate of 52% on the gain arising on the exercise of the shares. The gain arising on the shares will be calculated as the difference between: (a) the market value of the shares at the date of exercise; and (b) the amount you paid for the shares at the time of exercise. Once a share option scheme is exercised, an individual is required to file an RTSO1 and remit the tax to Revenue within 30 days of exercising. You will also be required to register for income tax and a Form 11 will be required to be filed. If you exercise shares in 2021, you will be required to file a Form 11 by 31 October 2022.
Sale of SharesIf you exercise your share options and then subsequently dispose of the share you acquired you may be liable to Capital Gains Tax (CGT). You must report this disposal to Revenue, even if no tax is due. The CGT would be calculated as the difference between the sales proceeds and the base cost of the shares. The base cost would compromise the cost paid for the share options (if any), the price paid for the shares on the exercise of the share options and the gain arising on the exercise of the share option. The gain arising would then be subject to CGT at a rate of 33%. If the shares are disposed of between 1st of January and 30th of November, the CGT would be due on the 15th of December. If the shares are disposed of between 1st of December and 31st of December, the CGT would be due on the 31st of January. The disposal will be required to be reported in your income tax return for the year the shares were disposed. We have set out above a high-level overview of the compliance obligations for employers and employees on unapproved share schemes. As discussed, we will look in our next article at the benefits or alternative share option scheme such as KEEP and growth shares. If you are offering a share option scheme to your employees or have a share award you wish to exercise or sell you should talk to our tax team at Roberts Nathan.
2021 Exchequer Results
Artists Exemption (Income Tax and VAT Implications)
- Arts Council Bursaries when paid directly to individuals by the Arts Council.
- Residencies when paid directly to the individual by the Arts Council for the purposes of producing a qualifying work. (Income from residencies which relate to teaching art or facilitating other individuals to create works of art or similar type practices do not qualify for exemption.)
- Cnuas payments under the Aosdana Scheme.
- Payments from the sale of qualifying works abroad, which fall within the guidelines.
- Advance royalties.
Business Succession Planning
Interaction of CGT and CATThere is a requirement in both retirement relief and business asset relief for the assets to be held by the successor for 6 years, otherwise these reliefs may be subject to a clawback. It is also important to note that where both CGT and CAT apply on a transfer, a tax credit may be available for the CGT suffered against the CAT due. This is referred to as same event credit and is only available where the assets are held for two years by the successor from the date of gift. Stamp Duty A recipient of a gift may suffer stamp duty at market value of the assets. Stamp duty on business assets is generally applied at 7.5% whereas shares in a trading company would be subject to stamp duty at 1%. Conclusion Where there is a plan to allow a new generation take over a business it is important to consider the tax implications in advance. Retirement relief and business asset relief may result in value passing without a significant tax leakage. Now may be an opportune time to consider such a transfer. Many businesses which have had limited trade in the past 18 months may have a lower market valuation and it is always a fear that there may be changes to capital taxes in future budgets as the government try to ensure a strong exchequer take given the cost of covid reliefs. In Roberts Nathan we have experienced teams in both tax advisory and corporate finance advisory to help you with such business decisions. Please use the link to contact Brendan Murphy for any questions on any part of the above: https://www.robertsnathan.com/member/brendan-murphy/
Returning or Relocating to Ireland (Tax Implications)
- Split Year
- Special Assignee Relief Programme (SARP)
- Payroll Obligations
Updates to EWSS scheme
- Actual monthly turnover details for January to December 2019,
- Actual monthly turnover details for Jan to June 2021 and
- Monthly projections for July to December 2021.
How To Minimise Your Tax Liability As A Business Owner
Methods to reduce tax liabilities as a business owner
- Maintain systematic record
- Tax credit
- Finance capital expenses for tax exemptions
- Engage your spouse or any other family member
- Change your company's accounting reference date
- Preliminary tax
- Travel and subsistence
- Consider turning into a Limited Company
- Generate management accounts before the end of the year
RN Podcast: 2021 – What is in store for the Irish tax landscape in the year ahead
Cash flow benefit for companies importing stock from outside the EU (including UK/EU trade).
- provides for postponed accounting for VAT on imports from non-EU countries
- enables you to account for import VAT on your VAT return
- allows you to reclaim VAT at the same time as it is declared in a return. This is subject to normal rules on deductibility.