Tax Implications for Share options
Discussion
Can one of the tax guru's help?
I am thinking about joining a company where i have been offered share options. the company is privatly owned by its directors. The share options will be available at a fixed price (agreed when i start) and i will have the option to buy those shares at the end of 12months (or not if i decide).
My problem is that there is pretty much no way i would be able to afford all the offered share options at the end of 12months as i won't be able to save the amount required in that timeframe - so i had an idea.
Would I be legally be able to not take a wage for those 1st 12months and then use my "accrued" credit to acquire the share options? This way the company can hold onto its cash (by not paying me) and then gift me the shares at the end of the 12months?
Any issues in doing this?
I am thinking about joining a company where i have been offered share options. the company is privatly owned by its directors. The share options will be available at a fixed price (agreed when i start) and i will have the option to buy those shares at the end of 12months (or not if i decide).
My problem is that there is pretty much no way i would be able to afford all the offered share options at the end of 12months as i won't be able to save the amount required in that timeframe - so i had an idea.
Would I be legally be able to not take a wage for those 1st 12months and then use my "accrued" credit to acquire the share options? This way the company can hold onto its cash (by not paying me) and then gift me the shares at the end of the 12months?
Any issues in doing this?
Edited by anonymous-user on Saturday 20th February 09:00
Tax regulations surrounding shares and share options for employees and directors are EXTREMELY complex.
The nub of the issue is that HMRC do not really like them and if they think that they are being paid to staff in lieu of normal salary bonuses, they will treat them as if they WERE salary bonuses and ask the employer to deduct and pay over to HMRC the full amount of PAYE and Class 1 National Insurance (Employee's and Employer's) that would normally be due on the equivalent straightforward salary bonus.
HOWEVER, if the share options are not exercised until a fixed time period has expired (5 years rings a bell), then they are trated as Capital Gains rather than ordinary earned income and the Capital Gains Tax rules will apply to the cash amount when it is received.
The advantages of Capital Gains over Earned Income are -
the individual has a Capital Gains Tax allowance of £10,100, If total gains for the year are less than this amount, no tax is payable at all.
the rate of Capital Gains Tax is a fixed 18%. If the individual is a higher rate tax payer, additional income would be taxed at 40% under Income Tax rules. So that could be a substantial tax savings. Some classses of shares might even be subject to the special Business Asset Capital Gains Tax rate of 10%.
Capital Gains are not subject to National Insurance contributions.
So, you can see that getting paid with shares in lieu of wages can be extremely tax efficient, provided the complex criteria are met.
The nub of the issue is that HMRC do not really like them and if they think that they are being paid to staff in lieu of normal salary bonuses, they will treat them as if they WERE salary bonuses and ask the employer to deduct and pay over to HMRC the full amount of PAYE and Class 1 National Insurance (Employee's and Employer's) that would normally be due on the equivalent straightforward salary bonus.
HOWEVER, if the share options are not exercised until a fixed time period has expired (5 years rings a bell), then they are trated as Capital Gains rather than ordinary earned income and the Capital Gains Tax rules will apply to the cash amount when it is received.
The advantages of Capital Gains over Earned Income are -
the individual has a Capital Gains Tax allowance of £10,100, If total gains for the year are less than this amount, no tax is payable at all.
the rate of Capital Gains Tax is a fixed 18%. If the individual is a higher rate tax payer, additional income would be taxed at 40% under Income Tax rules. So that could be a substantial tax savings. Some classses of shares might even be subject to the special Business Asset Capital Gains Tax rate of 10%.
Capital Gains are not subject to National Insurance contributions.
So, you can see that getting paid with shares in lieu of wages can be extremely tax efficient, provided the complex criteria are met.
Thanks Eric.
So is there any legal way of swinging this.
As I see it, if I take no salary, I can't really be classed as an employee.
I won't pay tax becasue I've earnt nothing.
To all intents and purposed i would be "starting" at this company in 12 months time and as part of my joining arrangements I would be given say 10% of the shares of this private company.
What could/would HMRC do? The shares don't actually have any value as its a private company?
FYI Would probably be looking to build up and sell company within 3 years.
Cheers
So is there any legal way of swinging this.
As I see it, if I take no salary, I can't really be classed as an employee.
I won't pay tax becasue I've earnt nothing.
To all intents and purposed i would be "starting" at this company in 12 months time and as part of my joining arrangements I would be given say 10% of the shares of this private company.
What could/would HMRC do? The shares don't actually have any value as its a private company?
FYI Would probably be looking to build up and sell company within 3 years.
Cheers
Edited by anonymous-user on Saturday 20th February 12:57
Eric Mc said:
Will you be working for the company?
Will you have duties and respnsibilities within the company?
Do you expect to be recompensed for providing these services?
Yes to all the above - but how would HMRC handle this?Will you have duties and respnsibilities within the company?
Do you expect to be recompensed for providing these services?
An employee who works for nothing (or a nominal sum) who at the end of 12 months receives shares which have an unquantifiable value?
Bandit said:
Eric Mc said:
Will you be working for the company?
Will you have duties and respnsibilities within the company?
Do you expect to be recompensed for providing these services?
Yes to all the above - but how would HMRC handle this?Will you have duties and respnsibilities within the company?
Do you expect to be recompensed for providing these services?
An employee who works for nothing (or a nominal sum) who at the end of 12 months receives shares which have an unquantifiable value?
Firstly, the legal and tax onus to notify HMRC rests entirely on the shoulders on the employer. It is an offence if the employers fail to fulfill this duty.
Secondly, HMRC have very kindly invented a special form (Form 42) to allow employers to provide the details of all equity based salary substitutes.
HMRC would argue that the shares issued DO have a quantifiable value. The argument will be what value that is. If you can't provide a valuation - or provide a valuation that they cannot agree, they will appoint a District Valuer to do it for you - and they will no doubt arrive at a figure favourable to them.
There are also strict time limits within which all this has to be notified, agreed, settled and tax paid.
There may be some simpler solutions:
1) You could try exercising the options in two or more tranches, using the profit from the first bunch to pay for the exercise of later amounts - you are not normally obliged to exercise all or none of them in one go. Not easy though in a private company.
2) I do know of people who have been allowed to exercise the option, take possession of the shares, sell them, and repay the company within a defined time period. This is not normally done, but might be possible.
On tax treatment; unless it is a scheme 'Approved' by the IR (unlikely given the short timescale) it is likely to be taxed as income, and potentially liable for NI. Tax is normally calculated at point of sale rather than exercise, so gives a breather.
Having said this, as a privately held company this sounds complex as the shares cannot be easily traded until the company is sold. Maybe make sure the exercise period is valid for say 10 years?
1) You could try exercising the options in two or more tranches, using the profit from the first bunch to pay for the exercise of later amounts - you are not normally obliged to exercise all or none of them in one go. Not easy though in a private company.
2) I do know of people who have been allowed to exercise the option, take possession of the shares, sell them, and repay the company within a defined time period. This is not normally done, but might be possible.
On tax treatment; unless it is a scheme 'Approved' by the IR (unlikely given the short timescale) it is likely to be taxed as income, and potentially liable for NI. Tax is normally calculated at point of sale rather than exercise, so gives a breather.
Having said this, as a privately held company this sounds complex as the shares cannot be easily traded until the company is sold. Maybe make sure the exercise period is valid for say 10 years?
Edited by Biggles111 on Sunday 21st February 09:51
There isn't really a way you can dupe the tax man by paying no tax and using the money to buy the shares, however there are a couple of options you/ the company can think about.
1. Set the share option up so you have the option to buy the shares on an exit event i.e. sale or listing. You can set the option up so once an offer for the company is recieved you can write a cheque to exercise the option and acquire the shares. Then once the company sells you receive proceeds as if you were a 10% shareholder and get the money in the bank before the cheque is cashed.
2. Set the share option up in the most tax efficent away. Suggest to the company that they speak with their advisers to see whether the company satisfies the criteria for the Enterprise Management Incentives ('EMI') scheme.
3. Not sure how much tax is at stake, but the company could consider creating a new class of share of which value could be depressed. You could then acquire them at minimal value (possibly par) and become a shareholder. Its a very technical area so the company MUST seek specialist legal and valuation advice but in simple terms you could possibly create a class of share that only share in the proceeds of a sale above, say £10m. Assuming the company is not worth that much and isn't likely to be for a good few years the argument could be had with HMRC that the shares have no value above their par value.
ETA: Reading through the posts another idea came to mind. What you could do is get a valuation of the shares done after 12 months, pay as much as you can personally afford and then have a loan outstanding with your employer for the balance (You can either pay this off as you go along or wait until the shares sell). You wouldn't be taxed on the shares as long as you pay full market value for them and on the loan (assuming interest free) you would only pay tax on the interest so for example £10,000 loan * 4.75% (HMRC official rate of interest) = £475 interest per year at 20% = £95 at 40% = £190.
1. Set the share option up so you have the option to buy the shares on an exit event i.e. sale or listing. You can set the option up so once an offer for the company is recieved you can write a cheque to exercise the option and acquire the shares. Then once the company sells you receive proceeds as if you were a 10% shareholder and get the money in the bank before the cheque is cashed.
2. Set the share option up in the most tax efficent away. Suggest to the company that they speak with their advisers to see whether the company satisfies the criteria for the Enterprise Management Incentives ('EMI') scheme.
3. Not sure how much tax is at stake, but the company could consider creating a new class of share of which value could be depressed. You could then acquire them at minimal value (possibly par) and become a shareholder. Its a very technical area so the company MUST seek specialist legal and valuation advice but in simple terms you could possibly create a class of share that only share in the proceeds of a sale above, say £10m. Assuming the company is not worth that much and isn't likely to be for a good few years the argument could be had with HMRC that the shares have no value above their par value.
ETA: Reading through the posts another idea came to mind. What you could do is get a valuation of the shares done after 12 months, pay as much as you can personally afford and then have a loan outstanding with your employer for the balance (You can either pay this off as you go along or wait until the shares sell). You wouldn't be taxed on the shares as long as you pay full market value for them and on the loan (assuming interest free) you would only pay tax on the interest so for example £10,000 loan * 4.75% (HMRC official rate of interest) = £475 interest per year at 20% = £95 at 40% = £190.
Edited by Mx_Stu on Monday 22 February 11:46
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