New Job - How does tax work when shares are gifted?
Discussion
I am in the fortunate position of having an interesting job offer in front of me.
One of the benefits is that each year I will receive shares to the value of my annual salary, share value currently £3.72. Other shareholders are the investment company and other directors. The plan is an exit/flotation after 5 years. Share value will multiply as pipeline is in place for t/o and profit to grow by about 300%.
How does tax work on the shares. Would it be CGT when they are sold or will I be hit by Income Tax when they are gifted. If its relevant I am a married higher rate tax payer and the shares gifted each year will be 6 figures in value.
I don't have an accountant at present, am I going to need one?
One of the benefits is that each year I will receive shares to the value of my annual salary, share value currently £3.72. Other shareholders are the investment company and other directors. The plan is an exit/flotation after 5 years. Share value will multiply as pipeline is in place for t/o and profit to grow by about 300%.
How does tax work on the shares. Would it be CGT when they are sold or will I be hit by Income Tax when they are gifted. If its relevant I am a married higher rate tax payer and the shares gifted each year will be 6 figures in value.
I don't have an accountant at present, am I going to need one?
Both. If you are gifted something with a value as part of your employment, then you will need to pay tax on its value at your highest tax rate... basically consider it to be extra income.
As I understand it (IANATA) This would be at the point that the shares become an actual asset that you can do something with (are you able to sell these shares?). When you do sell, you are then liable for capital gains tax on the increase in the value of the shares in the time you own them (subject to the allowance - which I think is around £12k profit in any one year).
E.g. you are gifted a share at £3. You pay income tax on that £3. You later sell that share for £10. You are liable for capital gains tax on the £7 profit IF your total gains for the year are above the limit (and only on gains above the limit).
So if you make a profit of £10k on the shares you sell in any one year, assuming you have no other capital gains in that year, then no tax to pay.
If you make £14k profit on the shares you sell in any one year, you pay tax on the amount above the threshold, so in this example £2k
I must go and look up what the threshold is for CGT this year.
Edit to add, at that income level you will be required to submit a self assessment tax return. You can do this yourself online - it sounds a simple enough set up that you can do it yourself. Personally I pay an accountant a couple of hundred quid a year to do our tax returns for us to make sure we take advantage of any benefits we do not know about (we have share schemes, dividends, rental and overseas property to consider) but that is a choice rather than a necessity.
As I understand it (IANATA) This would be at the point that the shares become an actual asset that you can do something with (are you able to sell these shares?). When you do sell, you are then liable for capital gains tax on the increase in the value of the shares in the time you own them (subject to the allowance - which I think is around £12k profit in any one year).
E.g. you are gifted a share at £3. You pay income tax on that £3. You later sell that share for £10. You are liable for capital gains tax on the £7 profit IF your total gains for the year are above the limit (and only on gains above the limit).
So if you make a profit of £10k on the shares you sell in any one year, assuming you have no other capital gains in that year, then no tax to pay.
If you make £14k profit on the shares you sell in any one year, you pay tax on the amount above the threshold, so in this example £2k
I must go and look up what the threshold is for CGT this year.
Edit to add, at that income level you will be required to submit a self assessment tax return. You can do this yourself online - it sounds a simple enough set up that you can do it yourself. Personally I pay an accountant a couple of hundred quid a year to do our tax returns for us to make sure we take advantage of any benefits we do not know about (we have share schemes, dividends, rental and overseas property to consider) but that is a choice rather than a necessity.
Edited by TriumphStag3.0V8 on Friday 11th March 09:34
Thank you. Thats useful. So I would have to find circa 45% of the value of the shares when they are gifted to me. Hmm, that would be all of my bonus (which I had earmarked to pay off mortgage and buy a toy) 
If the shares are options at a fixed price would I pay income tax when the options are given to me or when they are exercised?
If the shares are options at a fixed price would I pay income tax when the options are given to me or when they are exercised?
I'm not an accountant, but would recommend having a short chat with one as it depends on the categorisation of share scheme that you have.
Under our scheme, we had a £30k allowance free from income tax and only subject to CGT.
Once this allowance was expunged, gains on shares are taxed at the exercise point, basically as additional income.
However, there are different setups, etc so talk to someone in the know
Under our scheme, we had a £30k allowance free from income tax and only subject to CGT.
Once this allowance was expunged, gains on shares are taxed at the exercise point, basically as additional income.
However, there are different setups, etc so talk to someone in the know
melted said:
Thank you. Thats useful. So I would have to find circa 45% of the value of the shares when they are gifted to me. Hmm, that would be all of my bonus (which I had earmarked to pay off mortgage and buy a toy)
If the shares are options at a fixed price would I pay income tax when the options are given to me or when they are exercised?
Sadly yes. If they are shares that you are able to sell (and not held by the company in trust for you - are they yours immediately or do they vest over time?) then you need to pay income tax in the year that you received them. Your toy would be deferred! but you would have a load of shares to sell at some point. It is complicated and there may be something about the scheme itself that has some tax protections (e.g. an allowance each year). If the shares are options at a fixed price would I pay income tax when the options are given to me or when they are exercised?
My share scheme is different as it is a publicly traded company and I pay tax when the awarded shares vest (i.e. when I can sell them).
For options, it depends on the options scheme. With mine (HMRC favoured scheme) as long as I keep them for 3 years, then there is no income tax element, just the possibility of CGT when they are exercised. If I sell within 3 years of award, there is a formula used to calculate the equivalent value of an option for income tax purposes. There are different ways of doing this, and if the company is offering shares or options, they must have investigated the tax implications and be able to offer some advice - although the usual advice is "speak to a tax advisor", they should be able to advise if the options package is tax favoured or not, and whether there are vesting conditions (same for the shares).
What hasn't been sent to me yet is the details of how the shares will work and it looks like that is the crux of it.
In terms of the share value, it is indeed a private company but has a small group of investors. The share value is at the price the investors paid. The investors have committed about £130m, the business has about 200 employees and is a manufacturing and tech business. Obviously my shares will be a tiny proportion.
In terms of the share value, it is indeed a private company but has a small group of investors. The share value is at the price the investors paid. The investors have committed about £130m, the business has about 200 employees and is a manufacturing and tech business. Obviously my shares will be a tiny proportion.
melted said:
The share value is at the price the investors paid. .
Fair enough. But there's no active market/willing buyers so that's no guide to the value of the shares today. Presumably there's no plan to pay a dividend unless/until IPO/trade sale happens and you'd need approval to sell the shares even if there was a willing buyer out there? So what are they worth to you in cash today? Zero. The shares only acquire value to you if/when the company does an IPO/trade sale at which point you can sell them. What happens if you want to leave before then - do you forfeit the shares entirely or sell them back to the original investors at £3.72?
At the point of IPO/trade sale you will (hopefully!) have a CGT bill to pay. But say your salary is £100k and you're given shares to the value of £100k on top how could you pay income tax on the £100k value of the shares out of your £100k salary? You'd have no salary left!
melted said:
What hasn't been sent to me yet is the details of how the shares will work and it looks like that is the crux of it.
In terms of the share value, it is indeed a private company but has a small group of investors. The share value is at the price the investors paid. The investors have committed about £130m, the business has about 200 employees and is a manufacturing and tech business. Obviously my shares will be a tiny proportion.
If you’re raising £100m+ then I’d expect some serious thought will have gone into the employee equity. This being the case, it is unlikely that there will only be a single class of unrestricted ordinary shares, which means that the precise details of what you’re getting and how the value is arrived at are important. Without knowing the detail, people could be a very long way out in their advice…In terms of the share value, it is indeed a private company but has a small group of investors. The share value is at the price the investors paid. The investors have committed about £130m, the business has about 200 employees and is a manufacturing and tech business. Obviously my shares will be a tiny proportion.
The company should, if they have thought it through, have taken external advice on how any scheme should work and have a plain English guide for employ/prospective hires that they can share with you. Assuming you’re not the only one expecting equity, you won’t be the only one asking similar questions!
GibsonLP said:
Have you clarified the "gift" aspect here - more typically equity compensation is granted in the form of options rather than a free handing over of shares(?)
Not for a long time, by far the most common employee equity participation schemes have been thre granting of Restricted Stock Units which are indeed free to the recipient but come with caveats, options are very much a top of the tree incentive.melted said:
Thanks everyone.
I have taken some advice and discussed with the company. Its share options that do not become mine until I choose to exercise the option. As I understand it that sorts the tax.
No to deal with post termination restrictive covenants.........
It sorts the tax insofar as you pay it on the difference between the option price and the price on the day you exercise the option. I have taken some advice and discussed with the company. Its share options that do not become mine until I choose to exercise the option. As I understand it that sorts the tax.
No to deal with post termination restrictive covenants.........
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