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2005/06 Tax Guide
 

Employee Share Options - Tax Planning


Types of Options

1 Long option Grant is a benefit in kind
2 Unapproved share option No benefit on granting
Liable to income tax on exercise
Tax Due 31/1 after tax year end
3 Unapproved share option granted after 11/96 Liable to income tax on exercise
Tax Due on exercise
4 Approved Scheme No benefit on grant
No IT on exercise
Capital Gains tax on disposal
5 Approved scheme - unapproved exercise No benefit in kind on grant
IT due on exercise
Tax due 31/1 after tax year end
6 Approved Share Save scheme As for approved scheme but separate application of the three year rule

Exercise Liable to Income Tax

  1. "Price you might reasonably expect to obtain for the shares"
  2. Deduct amount paid for shares on exercise
  3. Deduct price paid for option

If you sell shares on the same day Revenue normally accept what you obtained.

If no same day sale then mid market price for the day of exercise.

Disposal liable to Capital Gains Tax

  1. Sale proceeds
  2. Deduct price paid for shares
  3. Deduct costs of sale and acquisition
  4. Deduct indexation allowance if shares owned pre 6/4/98
  5. Deduct taper relief

NB. If the shares were acquired on an exercise when income tax was paid then the price paid for the shares is the exercise price included for income tax purposes.

Identification rules

If you acquired shares on more than one occasion then rules proscribe which shares you are treated as selling.

  • Same day
  • Acquisitions within 30 days
  • Post 5/4/98 acquisitions on LIFO basis
  • Post 5/4/82 and pre 6/4/98 which were pooled including indexation allowance
  • Pre 5/4/82
  • Pre 6/4/65
  • Acquisitions made more than 30 days after the disposal

Taper Relief

1 Business Asset Throughout Own for > 1 year.
75% after 4 years
2 Non-business asset throughout Own for > 3 years.
40% after 10 years
3 Change of category part way through ownership Treat as two separate assets.
Time apportion gain

NB Shares in a company of which you are an employee are business assets from 6th April 2000.

If you own employee shares from 6/4/98 - 6/4/2004 maximum relief 50%

Gains on business assets Gains on non-business assets
Number of complete years after 5/4/98 for which asset held Percentage of gain chargeable Equivalent tax rates for higher rate taxpayer Number of complete years after 5/4/98 for which asset held* Percentage of gain chargeable Equivalent tax rates for higher rate taxpayer
0 100 40 0 100 40
1 87.5 35 1 100 40
2 75 30 2 100 40
3 50 20 3 95 38
4 or more 25 10 4 90 36
      5 85 34
      6 80 32
      7 75 30
      8 70 28
      9 65 26
      10 or more 60 24

* Including bonus year added for assets held on 17 March 1998

Taper Relief Example

Shares owned by an employee

Sale Proceeds
16/5/2004		 100,000
Cost
15/5/2000		 40,000
Gain 60,000
Taper Relief (75% > 4 years) 45,000
Gain Chargeable to tax 15,000
Annual exemption (estimated) 8,000
Amount chargeable to tax 7,000

Second Taper Relief Example

Shares owned by an employee since 1998

Sale Proceeds
16/5/2004		 100,000  
Cost
15/5/1998		 40,000  
Gain 60,000  
  Business Non-Business
  40,000 20,000
Taper Relief 75% 0%
Taper Relief (75% > 4 years) 30,000 0
Net gain 15,000 20,000
Gain Chargeable to tax 35,000  
Annual exemption (estimated) 8,000  
Amount chargeable to tax 27,000  

Income Tax Planning

  1. Postpone exercise until you want to sell the shares unless you can use CG planning
  2. Normally sell on same day as exercise to avoid tax charge and no money
  3. If tax is due 31/1 after year end then postpone to after 6/4
  4. Top up 6 years pensions (although the value of the exercise is not pensionable)
  5. Use up basic rate band each year
  6. Charitable giving
  7. Invest in ISAs
  8. EIS if you have a lot of money
  9. Film Finance Schemes

NB Investment considerations should not be ignored.

Capital Gains Tax planning

  1. Postpone sale to after tax year end
  2. Split disposals with spouse. Shortly prior to sale
  3. Employee should hold shares "long term"
  4. Stay an employee or sell before you leave
  5. Top up pensions reduces effective rate on CGT
  6. Transfers to third parties(e.g. children) before an increase in price
  7. Transfers to trusts
  8. Use up annual exemption and basic rate band each year
  9. Enterprise Investment Scheme and VCTs

EIS & VCTs

  1. Invest in new shares in unquoted trading companies
  2. Capital gains tax is deferred until the new shares are sold
  3. Company must spend the money within one year of trading
  4. 3 year minimum period of trading
  5. Additional 20% income tax relief is possible if own less than 30% of shares
  6. VCTs are quoted funds which themselves invest in EIS companies

Record Keeping

  1. Option agreement with company
  2. Notice of exercise form
  3. Brokers statement for shares sold
  4. Share certificates for shares retained
  5. Agreements for transfer of shares - if any
  6. Running total of shares probably on a spreadsheet

What happens when a person dies without a will?

  1. Joint assets pass to the surviving joint owner automatically.
  2. Otherwise rules of intestacy apply. Your assets are not distributed as you would wish.

Example 1

  • Surviving spouse and children

The surviving spouse receives:

  • personal effects
  • £125,000
  • a life interest (i.e. only entitled to the income not the capital) in one half of the residuary estate.

The children receive the other half of the residuary estate held on in trust until they are 18.

Example 2

  • Surviving spouse, no children but either parents, brothers or sisters or nephews or nieces

The surviving spouse receives:

  • personal chattels
  • £200,000
  • half of the residuary estate absolutely.

The parents receive the other half of the residuary estate (if both alive in equal shares).

In the absence of a parent, the half share not taken by the spouse devolves upon brothers and sisters

Example 3

  • Unmarried partner and children

The surviving partner receives nothing.

The children of the relationship receive the estate held on trust until 18.

Why have a Will? Choice and Flexibility

  1. You choose who is to inherit your estate and in what proportions
  2. You can deal with specific items of sentimental value
  3. You choose who is to deal with your estate
  4. You can make special arrangements e.g. guardians for children
  5. You can achieve inheritance tax savings

The tax bill can be heavy

  • The first £234,000 (nil rate band) can be given away tax free.
  • IHT at 40% is payable on the excess.

The table below shows how much IHT payable on death of survivor where no IHT Planning

What you are worth together
£'000		 IHT Payable
£'000
500 106.4
750 206.4
1000 306.4
1500 506.4
2000 706.4

More tax is paid than necessary

  • Most married couples leave everything to each other because of IHT spouse exemption.
  • Flexible wills allow use of both nil rate bands
  • Potential IHT saving of £93,600

Example

H estate £434,000 W estate £366,000

Total £800,000

  • If H and W leave everything to each other

  • IHT payable on first death nil

    IHT payable on second death £226,400

  • If H and W have flexible wills and pass on assets to value of nil rate band to children on first death.

    IHT payable on first death nil

    IHT payable on second death reduced to £132,800

Giving away assets now

  1. Absolute gifts.
    IHT and CGT consequences
  2. Setting up trusts for the family.
    Discretionary trusts and accumulation and maintenance trusts
  3. Charitable trusts.
    Immortality!

To find out more about how we could help you as an Employer setup employee share option schemes or or as an Employee understand the Tax Implications of your Employee Share Option Scheme, please call us at +44 (0)1223 507080 or email at info@tax.uk.com 

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