Share schemes and entrepreneurs' relief
Article Date: Mar 05 2009
Get money back from the taxman
Lesley Stalker, head of tax at accountancy firm Robert James Partnership, explains how employee share schemes offer tax benefits to you as well as your staff.
In my first article, I explained how introducing an HMRC-approved employee share scheme can be a tax-efficient way of incentivising key employees when you can’t afford to give them a pay rise. But it’s not just the employee who benefits from such a scheme: there can also be tax benefits for the owner-manager or key shareholders in the company.
This is possible through entrepreneurs’ relief, which was introduced in last year’s Budget after widespread criticism of the changes to capital gains tax (CGT) announced in the Pre-Budget Report. It’s something of a misnomer as it allows an entrepreneur, director or employee who holds at least a five per cent stake in the company to pay CGT at ten per cent (rather than the normal 18 per cent). There are two catches: the individual must have held the shares for at least 12 months, and relief is only possible on gains up to a lifetime threshold of £1 million.
How does this relate to share schemes? Quite simply, the company establishes an employee share trust which acquires shares over which it will grant options to employees. These can be new shares issued by the company, or existing shares sold to the trust by current shareholders: for example, an owner-manager.
If existing shareholders sell their shares to the trust, they will pay CGT on the gain they make. However, they can claim entrepreneurs’ relief on gains of up to £1 million, potentially saving each shareholder up to £80,000.
There’s an additional advantage to this set-up, because you are creating a marketplace for employees to exercise their share options without having to sell your business.
Please be warned that all of the above applies only while the relief exists, and it could be withdrawn at any time. At the moment, however, it provides a way to incentivise employees in a downturn while crystallising a significant tax benefit for yourself at the same time.
