Following on from a previous blog in March which highlighted the compliance reporting obligations for share, we will now look at two of the more tax efficient methods of providing shares to your key employees.
The specific schemes which can provide a more tax efficient event for the employee are the Key Employee Engagement Programme (“KEEP”) and the concept of Growth Shares.
We have looked at the advantages of both of these share schemes below and the tax implications associated with them.
1. KEEP Scheme
Under 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 shares
The 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
Growth 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 Shares
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.
The content of this blog is intended to convey general information and educational advice. It should not be relied upon as professional advice. We have done our best to ensure that the information provided by Roberts Nathan is accurate and up-to-date but unintended errors or misprints may occur.
If you wish to obtain business advice or taxation advice please do not hesitate to get in contact with a member of our team.