ATXP6 UK
Syllabus A1. Income tax A1c. Income from employment

A1ci. Share option/Share incentive schemes

Syllabus A1ci)

Advise on the tax treatment of share option and share incentive schemes, including employee shareholder shares

Incentive Schemes

Share related income from employment

An employee incentive scheme provides financial incentives for employees to improve their work performance. 

Types of share schemes:

  1. Share incentive plans (SIP)

  2. Employee shareholder shares

  3. Company share option plans (CSOP)

  4. Enterprise management incentive scheme (EMIs)

  5. Savings-related share option schemes (SAYE)

Share incentive plans (SIP)

  1. Income tax - when you receive them

    Pay No income tax or NIC, (If you hold the shares for more than 5 years)

  2. Capital gains tax - when you sell them

    When you remove the shares from the plan, the cost of the shares = M.V. when removed, so there will be no capital gains tax.

How to get the tax advantaged treatment?

  1. Shares must be offered to all employees who have been working in the company for more than 18 months (It can NOT be selective)

  2. Maximum value of shares that the employer can give to the employee each tax year can not exceed £3,600

  3. Shares must be held for 5 years

Consequences of withdrawing the shares before 5 years from SIP

  1. Withdrawing shares in < 3 years

    I.T. and NIC consequences:
    I.T. and class 1 primary NIC are payable in the tax year of withdrawal based on the market value when withdrawn.

  2. Withdrawing shares in more than 3 years but  less than 5 years

    I.T. and NIC consequences:
    I.T. and class 1 primary NIC are payable in the tax year of withdrawal based on the lower of:

    1) MV when first awarded and
    2) MV when withdrawn from the SIP

  3. Capital gains tax the base cost of the share is the market value at the time they are withdrawn from the share incentive plan.

Illustration

Jake receives 100 shares valued at £2 from an approved SIP from his employer. 

He wants to know the tax implications if he sells them in:

1) 2 years (M.V. £4)
2) 4 years (M.V. £6)
3) 6 years (M.V. £8)

  • Solution

    No income tax will be payable in the year that the shares are received as this is an approved plan. 

    Selling in 2 years

    Income tax and class 1 primary national insurance is payable in the tax year of withdrawal based on the market value when withdrawn.

    Benefit: 

    M.V. £4*100 = £400 
    Less cost (£Nil)
    Taxable benefit £400

  • Selling in 4 years

    Income tax and class 1 primary national insurance is payable in the tax year of withdrawal based on the lower of:

    1) MV when first awarded and
    2) MV when withdrawn from the SIP

    Therefore, M.V. when first awarded is lower at £2

    M.V. £2*100 = £200
    Less cost (£Nil)
    Taxable benefit £200

  • Selling in 6 years

    As the shares are held for more than 5 years in the approved plan, there is no income tax or NIC payable.

    Capital gains tax implications

    The cost of the shares are the market value of the shares when they leave the plan.

    Therefore if withdrawn in 2 years (M.V. £4 is cost), 4 years (M.V. £6 is cost) and 6 years (M.V. £8 is cost)

Employee shareholder shares

An employee shareholder is an employee who has entered into an employee shareholder agreement under which they give up employment rights in return for an award of shares, known as employee shareholder shares. 

The shares must be shares in the employer company, or in the employer company’s parent company.

The shares must be worth at least £2,000 and the employee must not pay anything for the shares. 

The employee must own LESS than 25% of the shares in the employer’s company.

  1. Income tax - when you get them

    Pay Income tax and NIC

    (MV of shares - £2,000) x I.T.

  2. Capital gains tax implications

    The first £50,000 of value of shares received are exempt

Illustration

Sam received 5,500 shares under the employee shareholder agreement when they have a market value of £10. 

He disposes of the shares in 3 years when the shares have a market value of £35. 

What are the tax implications?

Solution

  • I.T. and NIC implications

    When the shares are received a taxable benefit called the gift benefit in the tax year the shares are received.

    It is calculated as:
    MV of shares - £2,000

    5,500 shares * £10 = £55,000
    Less allowance (£2,000)
    Taxable benefit £53,000

  • Capital gains tax implications

    On the disposal of the shares the first £50,000 of value of shares received under an approved employee shareholder share scheme are exempt from capital gains tax on disposal.

    Therefore on disposal:

    Exempt disposal 
    5,000 * £10 = £50,000

    Chargeable disposal 
    Sale proceeds 500 * £35 = £17,500 
    Less 500 *£10 = (£5,000)
    Capital gain £12,500

    Entrepreneur's relief will be available as the conditions are satisfied.

Share options

A share option is an offer to an employee of a right to purchase shares at a future date at a pre-determined fixed price which is set at the time the offer is made. 

The pre-determined fixed price is usually below the market value of the shares at that time.

The taxation consequences of share options depends on whether or not they are approved by HMRC as follows. 

The tax advantaged share option schemes are the company share option plan (CSOP), the enterprise management incentive share option scheme (EMIs) and the Save As You Earn (SAYE) share option scheme.

Share option plans

  1. Income tax implications

  2. CGT - When you sell the shares

    Pay CGT:  (Market value @ sale date - Market value @ grant date) x CGT tax rate

Illustration

Jake wants to offer share options to 5 of his employees under the EMI scheme. 

On grant: 10,000 shares/employee when the shares have a market value of £2 and the exercise price is £1.75.

They can be exercised in 6 years when they have a market value of £6. 

What conditions need to be satisfied to qualify as an approved EMI scheme? 

What are the tax implications?

  • Solution

    Conditions to be satisfied

    1) The company must have less than 250 employees.
    2) Each employee must work for at least 25 hours/week.
    3) The company must have less than £30 Million in gross assets. 

    Income tax implications

    Market value on grant £2
    Less Ex. Price (£1.75)
    Benefit £0.25*10,000 shares = £2,500

    Capital gains tax implications

    The cost of shares will be the market value at the grant date. 

    Therefore,

    S.P  £5
    Less cost (£2)
    Capital gain £3*10,000 shares = £30,000 

    Entrepreneur's relief will be available at 10% as the conditions are satisfied.

Approved EMI scheme conditions

There are conditions that the company and the employee must satisfy for the share options to get the tax advantaged treatment

  • Conditions that the company needs to satisfy

    1) Gross assets must not exceed £30 million

    2) Employees in the company must not exceed 250

    3) Maximum value of share options issued must not exceed £3,000,000

  • Conditions that the employee needs to satisfy

    1) Employees must work for at least 25 hours per week

    2) Employee must own less than 30% of the shares in the company

    3) Maximum value of share options per employee £250,000

Approved CSOP scheme conditions

There are conditions that the company and the employee must satisfy for the share options to get the tax advantaged treatment

  • Conditions that the company needs to satisfy

    1) Gross assets must not exceed £30 million

    2) Employees in the company must not exceed 250

    3) Maximum value of share options issued must not exceed £3,000,000

  • Conditions that the employee needs to satisfy

    1) Maximum value of share options that can be issued is £30,000 per employee

    2) Each employee must own less than 30% of the shares

SAYE scheme

Employees are granted an option to buy shares and then save through a tax-free savings scheme in order to raise funds to exercise the option.

There is favourable tax treatment for share option schemes that are linked to a SAYE (Save As You Earn) contract.

  1. How does the scheme operate?

    Each employee pays a minimum of £10 per month and a maximum of £500 per month into a SAYE scheme, for a period of 3 or 5 years. 

    Interest on the scheme is exempt from income tax. 

    At the end of the scheme the money can be used to exercise the share options or the employee may just withdraw the money on their own.

  2. Income tax and NIC implications

    No income tax or national insurance will be charged on the grant of the option. 

    No income tax or national insurance will be charged on the exercise of the option.

    Capital gains tax implications

    On the subsequent disposal of the shares, a capital gain may arise.

  3. Conditions for the SAYE scheme

    1) The amount saved must be at least £5 per month but cannot exceed £500 per month.

    2) The savings contract must last for three or five years.

    3) The scheme must be available to all employees (full and part-time) who have worked for a specified qualifying period (which cannot exceed five years).

    4) The exercise price must be at least 80% of the shares’ market value at the time that the option is granted.

Illustration

B plc. has a proposed SAYE scheme. 

The duration of the scheme is 5 years.
The maximum monthly deposit into the scheme is £500. 

The scheme is available to all employees who have worked for at least 3 years. 

Exercise price £2.48
Market value at grant date £3

Will this qualify to be an approved SAYE scheme?

  • Solution

    Yes it will be.

    The conditions that have been satisfied are:

    1) The amount saved per month does not exceed £500.

    2) The savings contract lasts for 5 years.

    3) The scheme is available to all employees who have worked for 3 years.

    4) The exercise price is 82% (£3-£2.48/£2.48*100%) of the market value at the grant date.