Hold over relief on employment related securities ?

Hold over relief on employment related...

Didn't find your answer?

If a Director shareholder decides to give 25% of his 100% shareholding in his unquoted trading company to a key employee in order to retain him, I understand that employment related securities renders the market value of the non readily convertible asset as taxable income.  It is also a disposal by the director, but is he denied hold over relief because the market value of the shares is the base cost of the employees holding and the employee would therefore be foolish to sign a hold over election.

Would  there be any advantage or disadvantage in using NIL paid shares?

Thanks

Replies (4)

Please login or register to join the discussion.

avatar
By Anne Fairpo
24th Jul 2011 15:25

Options ...

Hold-over relief is not technically denied this case but, as you note, the employee would effectively pay tax twice – income tax on the deemed earnings, and capital gains tax on the original base cost of the shares. That said, the combined tax cost for the employee will still be less than actually buying the shares for market value (unless something happens to tax rates between acquisition and sale).

Using nil paid shares (presumably issued at market value by the company, to dilute the director/shareholder?) is more likely to result in a notional loan for employment tax purposes, so that the employee's income tax is based on the deemed interest on this notional loan until the shares are paid up. This certainly deals with the income tax charge on acquistion, but the employee will need to pay up the unpaid amount on the shares if it is called for by a liquidator (without necessarily having any funds to do so – and this is something that must be stressed to the employee), or before selling the shares.  

Taking a gift and electing for hold-over relief would cost the employee less than the nil paid shares (because the income tax and capital gains tax together should be less than the market value of the shares which would eventually have to be paid if nil paid shares are given), but does give a cashflow issue as the income tax will be due before any money is available to pay it - paying up prior to sale is usually less of an issue as the two can be more or less simultaneous.

Note that the company will not get corporation tax relief where nil paid shares are used – the relief is only available where the shares are fully paid up (under Chapter 2, Part 12, CTA 2009), and as a result the shares will be considered to be readily convertible assets for PAYE/NICs purposes although, where the notional loan rules apply, that's less likely to be an issue.

Also: is the director certain that he wants to give away 25%? That's enough to block resolutions etc in the company, which might not be quite what he intends and could cause real problems if there's a falling out later.  Just under 25% might be safer.  

Finally: what does the director/shareholder actually want the employee to benefit from? Ongoing dividends, or a percentage of the final sale proceeds?  If the latter, options might be a cleaner and better way to provide the benefit – much easier to deal with if there is a falling out, for example.

 

Thanks (0)
Nichola Ross Martin
By Nichola Ross Martin
25th Jul 2011 11:07

Maybe give away less?

I am in agreement with all that Anne says, but if you are wanting to reward by share ownership perhaps you might think about awarding fewer shares as a 25% shareholding is valued considerably higher than say a 10% or 5% holding and this can make all the difference as then there is less tax charged on the basis of the shares on a money's worth basis in the employee's hands.

An EMI share option scheme may be a better idea.

Virtual tax support for accountants: www.rossmartin.co.uk 

Thanks (0)
avatar
By d_doyle
25th Jul 2011 12:53

Interesting thought

Thanks for the replies of two such well respected  commentators.

The director shareholder has come up with something.  The employee has asked for 25% of the company, he says he was always promised.  The company is being groomed for sale and will be sold within 3 years.  If the Director shareholder instead post sale made a personal gift to the employee of £500,000.  Could that avoid the ERS issues.  Post sale the Director obtains his Enrepreneurs relief on disposal of the shares and then makes a gift of cash as a Potentially Exempt Transfer to the individual. 

HMRC would presumably attack this as by reason of his employment if of course they could link it to the employment. 

However it is of course nothing more than a personal gift out of love and affection?

 

 

 

 

Thanks (0)
avatar
By Anne Fairpo
23rd Aug 2011 18:39

Gifts are tricky

Sorry about the delay in response - I've been hijacked by client work and writing.

Giving money to an employee, even post-employment, is very difficult to do without an income tax charge arising for the employee (and possibly NICs).  HMRC would need to be convinced that there was some other genuine reason for giving away that much money and, in practice, they (and/or a Tribunal if it's argued that far) will be looking for something like a family relationship or a demonstrable close friendship to be in existence.  Both HMRC and the Tribunal are likely to be cynical about "love and affection" that isn't backed up by non-employment evidence!

Thanks (0)