Nichola Ross Martin, of the revisits an "old chestnut"; giving shares instead of cash.
Cash is tight this Christmas, not least because of the effect that the cut in the standard rate of VAT has had on cashflow. Many companies have taken the decision not to award cash bonuses, so why not give your secretary some shares instead, and call them a “long service” award, or just a gift?
One company director is doing just that...
Jim Shaw is the chief executive and chairman of a Aardvark Enterprises Ltd (AEL), which privately owned, well, actually all owned by the rest of the Shaw family. Debs has been his loyal secretary for 25 years this December, but at the tender age of 50 she has no intention of retiring. The board have agreed no cash bonuses this year, but they have consented to a gift of 100 shares with no strings attached for Debs in recognition of her services. The shares are currently worth about £200 each and she is a basic rate tax payer, earning about £25,000.
Jim has a vague notion that there is more to this gift than meets the eye. Will this gift create a unexpected tax liability? If so, could AEL pick up the tab for Debs’ tax? What about National Insurance?
Income tax or PAYE?
A gift or award in recognition of an employee's long service is taxable as employment income, unless exceptionally, it clear that the gift is a purely personal one made by a shareholder. Subject to tax relief on long service awards, which is discussed further down, allotting new shares directly from the company will make the gift taxable as employment income.
Shares in most private companies are not readily convertible assets – they cannot be easily sold for cash as there is no market or mechanism to do so. The award will trigger an income tax liability which must be met under self-assessment, not PAYE, at latest by the end of January following the end of the tax year.
National Insurance
National Insurance will not arise on the gift of shares, for the same reason as PAYE - they are not readily convertible assets.
Valuation
The first step for tax purposes is to agree a valuation with HMRC, note that any price agreed is only valid for 30 days or so. It is likely that a lower value than the estimated £20,000 could be agreed for tax purposes, because Deb’s shares will be a small minority holding, she will have little real influence over the company's affairs, and the shares will not be readily saleable. A substantial discount will apply compared to the value of the company's share capital as a whole.
Jim will want to instruct some advisers with expertise. Tax relief for long service awards A gift of shares (in the employer company or a member of its group) to a long-serving employee will be exempt from income tax up to a value of £50 per year of service (section 323, Income Tax (Earnings and Pensions) Act 2003). This applies only for employees with 20 or more years of service. Debs will not be taxed on £1,250 of the taxable value of the shares, assuming they are worth about £10,000, she will be taxed on £8,750. Restricted securities The value of the remaining gift will be taxable as "general earnings", but Debs will need to opt out of "restricted securities" tax. AEL’s articles of association may typically contain certain articles, such as standard pre-emption provisions and/or leaver provisions applying just to employee shares, which would or might put these shares into the To avoid more complicated tax issues in future, Debs can enter a joint election with AEL to opt out of the restricted securities regime before or within 14 days after the gift is made. The effect of this will be to make all of the value of the shares subject to the general earnings charge when they are given. If there is any uncertainty about whether the shares could be in the restricted securities regime, you can make the election as a precaution. Can the company pick up the tab for Debs’ tax? PAYE and NICs will apply when the company meets the tax liability, even though it would not apply if Debs met her own general earnings charge under income tax on the gift. Next time: Debs doesn’t does file a tax return. What does the company need to do to pick up her tax tab? *** Nichola Ross Martin is part of the editorial team at the Practical Law Company: PLC Shares & Incentive, PLC Tax and PLC Private Client. This article is based around one of the PLC Share Schemes and Incentives, features.
The company will take on this liability for her when it:
NICs will only arise on the value of the tax paid for the employee, not on the value of the shares.