Chapter 31 Introduction to share schemes

Question 1

general principles, gifts of shares to employees

Answer 1

There are four types of tax advantaged share schemes, share incentive plans, saving related share option scheme, company share option plans and enterprise management incentives. Company’s may give shares as a performance incentive or to retain staff.
General principles – when the company grants a share option the employee is receiving a piece of paper which gives them the right to acquire shares within a specified period of time. Only on the exercise of an option will the shares physically pass to an employee.
Gifts of shares to employees – this arrangement is not a share option. When free shares are given by an employer to an employee, there will normally be a charge on the employee at the date of the gift. If an employer transfers shares to an employee at a nil or reduced cost, this will give rise to taxable income in the hands of the employee.

Question 2

NIC implications of share gifts, income tax and NIC implications of non tax advantaged share option, CGT implications

Answer 2

NIC Implications of share gifts – if the shares are readily convertible it means they will be regarded as earnings for class 1 purposes. Readily convertible means it is easy for the employee to turn these assets into cash overnight. If they are listed on a stock exchange the shares will be readily convertible. 
Income tax implications of non-tax advantaged share option – there is no charge to income tax when a non-tax advantaged option is granted. However, when an employee exercises such options, there will always be an income tax charge. The value of shares at exercise less the cost of shares equals the amount treated as employment income.
NIC Implications of non-taxed advantaged share option schemes – where a quoted company grants non-tax advantaged share options to the employee, as the shares are readily convertible assets. NIC will need to be accounted for when the options are exercised. 
Capital gains tax implications of non-tax advantaged share option schemes – where shares acquired through non-tax advantaged options are sold, the capital gain is calculated as sale proceeds, less CGT base cost (amount paid for shares, amount charged to income tax at exercise). So, the base cost is actually the market value of the shares at exercise.