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Whilst gifting shares to employees may seem like an easy and simple way to reward employees and help with staff retention, it is important to keep in mind that the issue of shares or share options to employees may have tax consequences and will likely need to be reported to HMRC on an Employment Related Securities (ERS) end of year return.
Tax implications
We have seen instances where companies have issued shares to individuals who may be friends of the business owner for a value which would exceed what would be anticipated for a start-up company. This can cause issues for the business from a reporting position as it can set a high benchmark for the share price which can be counterproductive upon implementing a tax advantaged share scheme (where typically, optimal benefit is obtained for the company and employee where a low share value can be agreed at the granting stage). HMRC look at the recent transactions for shares when agreeing the exercise price in tax advantaged share plans, so it is crucial that businesses seek advice before issuing shares in a company.
If shares have been issued to employees at nominal value following a scenario like the above, HMRC may view the market value of the shares to be equal to the amount paid by the individual. The shares given to employees could then be considered as being issued at a discount and when this situation occurs, HMRC expects income tax to be paid on the difference between “market value” and the “discounted price”.
Whilst this situation can sometimes be explained to HMRC and the issue resolved, this is not guaranteed. We advise that you seek advice prior to issuing shares in your company to prevent a situation like this from occurring.
Shareholders of start-ups should also be careful when gifting shares from their personal shareholding. In this case, the gift is a capital disposal and may give rise to capital gains tax. If shares are gifted for no consideration (or consideration of less than the market value of the shares), the disposal is deemed to have taken place at market value which again could give rise to tax liabilities.
Reporting requirements
Shares and securities acquired by reason of an employment (this includes employees, directors, and office holders) fall within the scope of the ERS regime. The rules are widely drawn and extend to rights or opportunities to acquire securities, and the benefits in connection with shares and securities that are not otherwise chargeable to tax. The rules also capture cases where the securities, opportunities, or rights to acquire the securities, are provided by a person other than the employer, and where the securities are not directly received by the employee.
There are cases where the acquisition of shares or securities are not reportable. These include:
- On incorporation
- When the shares are issued in the normal course of domestic, family, or personal relationships.
The main question to ask when trying to determine if this case is applicable, is whether an employer is trying to reward or provide an incentive to an employee by issuing the shares or whether the reason is more of a personal relationship.