The employment-related securities legislation deals with arrangements involving shares and securities provided by reason of employment where the full value of the employment reward provided to the employee is not included in the salary package and is charged to tax.
The basic rule is that should an employee or director be given shares for free or pay less than the market value of the shares at the time of the award, a charge to income tax (and possibly National Insurance contributions (NICs)) will arise (under ITEPA 2003, s 62). The tax charge will be the difference between the market value and the price paid by the employee.
However, various tax-efficient share option schemes are available, which are intended to encourage employees and directors to participate in their employment companies. Such schemes permit shares to be awarded income tax-free and sometimes capital gains tax-free.
Anti-Avoidance
There are wide-ranging anti-avoidance provisions relevant to these arrangements, which encompass when shares and other securities are awarded not just to employees, but also to what HMRC terms ‘associates’. Associated persons include persons connected with the employee and members of the same household as the employee.
The rules broadly state that even if the person receiving the shares is not an employee, they are deemed to be in certain circumstances. For example, should a company issue shares to an employee who requests the shares be given to their spouse instead, the spouse would have acquired the shares from an ‘opportunity made available by reason of the employee’s employment’ (ITEPA 2003, s 471(1)). The shares would be deemed employment-related securities, and any tax would be chargeable to the employee’s spouse.
Should the employee wish the spouse to take ownership of the shares, the shares will have to be registered in the employee’s name first, taxed on the value and then transferred under the interspousal rules. Transfers of assets between spouses are normally at a no gain, no loss value for capital gains tax purposes.
Exception to the Rule
There is supposedly an exception from the tax charge where the shares are acquired for family reasons. ITEPA 2003, s 471 states that there will be no tax charge where:
‘A right or opportunity to acquire securities or an interest in securities made available by a person’s employer, or by a person connected with a person’s employer, is to be regarded … as available by reason of an employment of that person unless –
- the person by whom the right or opportunity is made available is an individual, and
- the right or opportunity is made available in the normal course of the domestic, family or personal relationships of that person.’
This is confirmed in HMRC’s Employment Related Securities Manual at ERSM20220 (‘Employmentrelated securities and options: ‘by reason of employment’ – exception for family or personal relationships’), which states:
‘We take a common-sense view of this exception. It would clearly apply if a father, on reaching retirement, hands over all the shares in his family company to his son and daughter simply because they are his children, even if they are both also employees of the family company’.
Practical Tip
In most cases, the transfer of shares to a family member who works in the family company will be covered by this exception, but it would be more difficult to prove where the individual concerned is an unrelated close friend or ‘associate’. If a company owner wishes to give shares to a child who does not work in the company as part of any succession planning, this should be undertaken by way of a gift.