Company share scheme - taxation?
Discussion
I have the opportunity to join a company share scheme - the usual stuff where a percentage of salary is paid into a scheme which then buys shares at a price favourable to me. I can then sell the shares as and when I want to.
My question is what the tax implications when I sell the shares?
If it helps the scheme is run by an American company with the shares managed by an American broker once purchased.
My question is what the tax implications when I sell the shares?
If it helps the scheme is run by an American company with the shares managed by an American broker once purchased.
At least in our company :
For "bonus" shares, when they vest it is treated as a lump of income - and hence it's all taxed as income. Our share holder services have an option to immediately sell enough shares to cover the tax part. When you eventually sell the shares, any gain will be liable to capital gains tax (but probably falls within your allowed amount for the year).
For purchasing shares - we can purchase them at a discount and the discount is applied to the lower of two prices (the price when we entered the scheme and the price when they vest). Therefore, we get them at least 15% cheaper than the current market value and possibly even cheaper than that (if they've gone up since we entered the scheme). That difference - between what we pay for them, and their market value when they vest each quarter - is again subject to income tax. And once again, when they are eventually sold - CGT.
Be a little careful. At least in our scheme, you contribute monthly and the shares vest each quarter. It is on that quarter that you pay the income tax on all the shares you bought for the quarter, and if they've risen significantly (plus your discount) that tax can make a hole in your salary that month (plus you'll still be buying a new months worth of shares). I didn't enter the share purchase thing - but some of my colleagues got a bit of a shock when they got paid last month.
For "bonus" shares, when they vest it is treated as a lump of income - and hence it's all taxed as income. Our share holder services have an option to immediately sell enough shares to cover the tax part. When you eventually sell the shares, any gain will be liable to capital gains tax (but probably falls within your allowed amount for the year).
For purchasing shares - we can purchase them at a discount and the discount is applied to the lower of two prices (the price when we entered the scheme and the price when they vest). Therefore, we get them at least 15% cheaper than the current market value and possibly even cheaper than that (if they've gone up since we entered the scheme). That difference - between what we pay for them, and their market value when they vest each quarter - is again subject to income tax. And once again, when they are eventually sold - CGT.
Be a little careful. At least in our scheme, you contribute monthly and the shares vest each quarter. It is on that quarter that you pay the income tax on all the shares you bought for the quarter, and if they've risen significantly (plus your discount) that tax can make a hole in your salary that month (plus you'll still be buying a new months worth of shares). I didn't enter the share purchase thing - but some of my colleagues got a bit of a shock when they got paid last month.
These schemes can be quite complicated to get one's head around.
The tax saving to be had on such schemes is that on receipt of the shares, no Income Tax or NI is initially paid. If and when the shares are later sold, they will be looked on as the sale of a capital asset and will be subject to Capital Gains Tax rather than Income Tax. And there will be no NI to pay either as the sale proceeds are not looked on as "Earned Income".
However, for the sale to be taxable under Capital Gains Tax the shares must have been distributed to the employees under a properly approved scheme AND the disposal must be made within time limits. If these criteria are not met, the tax savings may not transpire.
So, you need to get clear guidance from the employer as to what the tax advantages are for the specific scheme they are offering.
You will also need to know if you will have any reporting requirements for transactions under the scheme using Self Assessment.
The tax saving to be had on such schemes is that on receipt of the shares, no Income Tax or NI is initially paid. If and when the shares are later sold, they will be looked on as the sale of a capital asset and will be subject to Capital Gains Tax rather than Income Tax. And there will be no NI to pay either as the sale proceeds are not looked on as "Earned Income".
However, for the sale to be taxable under Capital Gains Tax the shares must have been distributed to the employees under a properly approved scheme AND the disposal must be made within time limits. If these criteria are not met, the tax savings may not transpire.
So, you need to get clear guidance from the employer as to what the tax advantages are for the specific scheme they are offering.
You will also need to know if you will have any reporting requirements for transactions under the scheme using Self Assessment.
Eric Mc said:
The tax saving to be had on such schemes is that on receipt of the shares, no Income Tax or NI is initially paid.
Sorry, but that is not true for the scheme we are in. Ours works as I've described - there is a saving on the purchase price (due to discounted price) and that difference is taxed when the shares are received / vest. So the discounted part is taxed - the main cost obviously isn't (for the share purchase scheme) because they were not income - they were purchased by the employee at a discounted rate.davek_964 said:
Sorry, but that is not true for the scheme we are in. Ours works as I've described - there is a saving on the purchase price (due to discounted price) and that difference is taxed when the shares are received / vest. So the discounted part is taxed - the main cost obviously isn't (for the share purchase scheme) because they were not income - they were purchased by the employee at a discounted rate.
I told you they were complicated 
Many schemes are not HMRC approved, often because they are "foreign" e.g. US based employers often have share schemes which may comply with US rules but may not comply with UK rules.
I repeat - the OP needs to check with the employer as to what, if any, tax savings are to be had and how they will work.
Ranger 6 said:
Thanks all - I have asked within the company but answers are slow in coming. From what I have found there is an Income Tax charge similar to davek's description above.
davek - can I ask which company as the 15% sounds familiar? PM if you'd rather not say openly?
The company I work for has a similar scheme. When it comes sale time, I will be taxed automatically. If I want to handle my own tax afairs, then I transfer the shares out to my own broker who simply give me the sales proceeds and leave me to deal with the tax man on my own.davek - can I ask which company as the 15% sounds familiar? PM if you'd rather not say openly?
Eric Mc said:
The tax saving to be had on such schemes is that on receipt of the shares, no Income Tax or NI is initially paid. If and when the shares are later sold, they will be looked on as the sale of a capital asset and will be subject to Capital Gains Tax rather than Income Tax. And there will be no NI to pay either as the sale proceeds are not looked on as "Earned Income".
Contrary to what I said earlier, it appears that this is the case with my company - as the shares are purchased and not given (as part of a bonus or similar) they are not subject to income tax or NI. The tax is only CGT on the gains made when sold and there's a £10,900 threshold per year on that.From what I've found with my company the income tax & NI liability comes when shares are given as part of a bonus or reward scheme.
I'm still waiting for HR to confirm that, but it's looking quite positive.
Thanks all for the advice
If your shares are purchased and not given - and if they are purchased at a discount - I'm still not sure how you avoid income tax at the point they are purchased / vest.
If your company gives you a 15% discount (which is what ours does) - that is like a 15% bonus and hence that 15% is taxable. I can't imagine how it could be avoided - it is no different from things like healthcare, car allowance etc - tax man gets his hands on all those benefits.
At least in our company, the difference between the real share price and what you actually paid for them is taxed, and deducted from pay each quarter.
If your company gives you a 15% discount (which is what ours does) - that is like a 15% bonus and hence that 15% is taxable. I can't imagine how it could be avoided - it is no different from things like healthcare, car allowance etc - tax man gets his hands on all those benefits.
At least in our company, the difference between the real share price and what you actually paid for them is taxed, and deducted from pay each quarter.
I've asked a couple of people I know at work today and from what they've said we aren't taxed in that way. You don't actually receive any money until they're sold, so that's the point of taxation.
We may be different from your company after all as one of them pointed me at the International clause in the purchase documentation which means we have a UK 'sub-plan' which aligns with HMRC for taxation rather than going by the US system.
We may be different from your company after all as one of them pointed me at the International clause in the purchase documentation which means we have a UK 'sub-plan' which aligns with HMRC for taxation rather than going by the US system.
Ranger 6 said:
I've asked a couple of people I know at work today and from what they've said we aren't taxed in that way. You don't actually receive any money until they're sold, so that's the point of taxation.
We may be different from your company after all as one of them pointed me at the International clause in the purchase documentation which means we have a UK 'sub-plan' which aligns with HMRC for taxation rather than going by the US system.
If that's the case, then it sounds like a good deal - but I don't understand how. I don't think that the fact you only receive the money when they're sold is what makes the difference - I don't receive any money relating to my private healthcare, however HMRC considers that it's a benefit in kind and hence taxes me for it's cost.We may be different from your company after all as one of them pointed me at the International clause in the purchase documentation which means we have a UK 'sub-plan' which aligns with HMRC for taxation rather than going by the US system.
If the current share price is £X, and you are able to buy the shares at £Y (where Y is less than X) then you are being given a benefit of £X - £Y at the point you buy the shares (when they vest). I'm surprised the tax man allows that to happen without wanting his cut - at least in our company he takes his cut. Maybe your employer gives you the discount but also pays the tax on the discount.
davek_964 said:
...If the current share price is £X, and you are able to buy the shares at £Y (where Y is less than X) then you are being given a benefit of £X - £Y at the point you buy the shares (when they vest).
Yes, but the shares aren't giving you a monthly benefit like healthcare, you don't get anything back (except perhaps dividends) while they're sitting in the brokers files - it's purely a one off 'bonus' when they're sold. What happens if the share price bombs when you sell them and you lose money - do you get a tax rebate on what they thought you'd make?So using your example for us the tax man assesses the selling price £S-£Y=£P Where £P is the total profit and includes £X.
Using your situation if you pay income tax on the 15% what happens if you sell them with a total 20% profit over what you paid - do you get taxed again then on the 5% profit with CGT when you actually sell the shares?
One other element I hadn't mentioned is that we don't actually purchase the shares every month, the payment is into a fund which then buys them at a single point, twice a year (I think?) the share price having been assessed over a 6 month period.
Ranger 6 said:
Yes, but the shares aren't giving you a monthly benefit like healthcare, you don't get anything back (except perhaps dividends) while they're sitting in the brokers files - it's purely a one off 'bonus' when they're sold. What happens if the share price bombs when you sell them and you lose money - do you get a tax rebate on what they thought you'd make?
So using your example for us the tax man assesses the selling price £S-£Y=£P Where £P is the total profit and includes £X.
Using your situation if you pay income tax on the 15% what happens if you sell them with a total 20% profit over what you paid - do you get taxed again then on the 5% profit with CGT when you actually sell the shares?
One other element I hadn't mentioned is that we don't actually purchase the shares every month, the payment is into a fund which then buys them at a single point, twice a year (I think?) the share price having been assessed over a 6 month period.
The fact that you may lose money when you sell them isn't relevant to income tax when they vest. You get a discount when they vest - which is a financial benefit. If you choose to sell them immediately, you have effectively been given a 15% bonus. If you keep them and play the market - then you take a risk, and that's independent of whether you saved money when you bought them. And yes - I do think you would be taxed at CGT for the extra money you make when you sell (although it's likely to be within your limit). So using your example for us the tax man assesses the selling price £S-£Y=£P Where £P is the total profit and includes £X.
Using your situation if you pay income tax on the 15% what happens if you sell them with a total 20% profit over what you paid - do you get taxed again then on the 5% profit with CGT when you actually sell the shares?
One other element I hadn't mentioned is that we don't actually purchase the shares every month, the payment is into a fund which then buys them at a single point, twice a year (I think?) the share price having been assessed over a 6 month period.
I understand that the cash doesn't turn up in your bank until you sell them - but you have saved 15% when you buy them. Basically, if you choose to enter this scheme - it's like your company saying : We'll pay 15% of the purchase price for you, which doesn't seem that different from them giving you an extra 15% in your pay to cover the share cost when you're in the scheme.
Ours are also not bought monthly - it is done every quarter.
As I said, it's good if you're not going to be taxed on the difference, but I would imagine somebody must be paying it. You are being "given" 15% of those shares for free. The fact that you don't get the money until you sell them (and you may get less) doesn't usually matter to HMRC. Look at a different kind of tax : Inheritance tax. If you inherit a house worth £500,000 - you will need to pay the inheritance tax when you inherit it - not when you sell it. And, there is no guarantee that the housing market won't collapse before you sell it - and you might actually get less for it in the end. Tax man doesn't usually care.
It's great if you're avoiding this - just makes your scheme extra good I think (or maybe ours is extra bad!).
Found it!!
HR have come back with an E&Y taxation guidance document. There are two types of schemes - approved and unapproved. The first is what we're on - CGT on the sale of shares, the second is what you describe - Income tax and NI on the difference in price, then CGT on gains when sold.
The key clause is: Your exercise is considered approved if the option was granted under an approved plan and is exercised by you on or after the third anniversary of the date of grant.
HR have come back with an E&Y taxation guidance document. There are two types of schemes - approved and unapproved. The first is what we're on - CGT on the sale of shares, the second is what you describe - Income tax and NI on the difference in price, then CGT on gains when sold.
The key clause is: Your exercise is considered approved if the option was granted under an approved plan and is exercised by you on or after the third anniversary of the date of grant.
I did mention the fact that there were "approved " and "unapproved" schemes in one of my earlier posts.
Schemes set up by UK employers are usually "approved" as they will have taken UK tax advice before setting the scheme up.
Schemes set up by foreign employers (often US based) are often unapproved for tax purposes in the UK (although they may be very tax efficient for US based employees).
Schemes set up by UK employers are usually "approved" as they will have taken UK tax advice before setting the scheme up.
Schemes set up by foreign employers (often US based) are often unapproved for tax purposes in the UK (although they may be very tax efficient for US based employees).
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