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Topical Tax: Employee tax planning with share options. By Paula Tallon

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16th Nov 2007
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Paula Tallon of Chiltern examines some recent questions handled by her team of specialist tax advisers.

Question:
My client owns 100% of the shares in a property investment company. He has one key employee and he would like him to have an equity stake. He wants the employee to have 15% of the shares in two years' time but at today’s price (£100,000). As the price is likely to increase to £150,000 there will be a tax charge in two years time. Is there a better way to structure this?

Answer:
Under the current arrangement your client will sell the shares for £100,000 when they have a market value of £150,000. His gain will be calculated using the £150,000 figure. The employee will be receiving shares at an undervalue so he will have an income tax charge on £50,000.
It would be more tax efficient to structure this as an option. If the employee is granted an option now to acquire shares in two years' time for £100,000, the capital gains tax computation for your client will use proceeds of £100,000. As a result he will not pay capital gains tax on proceeds he does not receive. The employee will still have an income tax charge but, overall, CGT on £50,000 will have been saved.

Previous Q & A
Maximising buy to let loan interest relief
Coprporation tax deductions and EMI

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