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Employee Share Schemes

Employee share schemes are used by many employers in the “global marketplace” to employee share schemesreward their employees.  This means rewarding them by not just paying them cash and traditional benefits in kind such as medical insurance, but by allowing participation in employee share schemes. This is particularly true of multi-national high technology companies situated all over the UK, but particularly in the Thames Valley and South East of England.

These share schemes come in a variety of different guises:

  • Share option plans – where the employee is granted an option enabling them to buy shares in the employing company. The option price is fixed based on the market value of the shares when granted and can be exercised in the future when the price of the shares has increased, therefore giving rise to an intrinsic “gain”. Such plans can be either HM Revenue & Customs HMRC) approved or unapproved. Tax is due on exercise unless participation is in an approved plan, when the tax point can be delayed until sale of the shares and dealt with under the capital gains tax rules. The benefits of approved plans include the avoidance of National Insurance Contributions for both employee and employer, and a reduction in tax liabilities for the employee as capital gains tax rates are lower than the general income tax rates.
  • Restricted stock – where the employee is given shares by the employer but does not enjoy unfettered use of the shares i.e. ownership is restricted in some way. Tax is normally due when the shares fully vest and ownership becomes unrestricted, and is due on the market value of the shares on vesting. However, it is possible to consider making an election to pay tax on the value of the shares at award rather than at vesting depending on circumstances, which could provide tax advantages.
  • Restricted Stock Units (RSUs) – where the employee is given a promise that shares may be acquired at some point in the future but where legal ownership is not conferred on the employee at the date of grant. Tax is due when the shares are acquired by the employee, based on market value of the shares at date of acquisition.
  • Long Term Incentive Plans (LTIPs) – normally umbrella plans of the employer under which share option, restricted stock and RSU awards are made.
  • Share Incentive Plans (SIPs) – HMRC approved plans whereby employees are given the opportunity to acquire relatively small numbers of shares in the employing company on beneficial terms and tax-efficiently.

 
There is a whole host of potential tax implications and planning opportunities available from participating in employee share schemes:

  1. The correct payment of “Paye As You Earn” tax and National Insurance Contributions when shares are acquired.
  2. The correct payment of capital gains tax and mitigation/deferment of liabilities by use of spousal transfers, annual exemptions and capital losses available.
  3. The remittance basis of taxation where capital gains are made by non-domiciled individuals on shares that are foreign sited.
  4. For internationally mobile employees, who have cross-border work histories with their employers, the position can be particularly complex and lead to substantial planning opportunities. Tax and social security can be due in more than one country on grant/vest/exercise/sale depending on personal circumstances. This can lead to planning opportunities for employees but headaches for employers who may need to legally withhold tax and social security contributions in more than one country. Foreign tax credits may be available to be claimed via the UK Tax Return.

Reporting of employee share scheme participation for income tax/capital gains tax purposes on the personal UK Self Assessment Tax Return can be complex and care should be taken to complete/attach the appropriate supplementary pages to the Return, and disclose any special circumstances.

As employee share schemes tend to be complex they can lead to HMRC investigations. If you want to protect yourself from possible audit and investigation by HMRC in to your personal Tax Returns there are HMRC investigation insurance policies available and we can advise you on the whether this might be a suitable option for you.

To speak to us about employee share schemes, please visit our contact us page or call us on 01962 856 990