Corporation tax relief emi options

Corporation tax relief emi options

Author: pashas Date: 21.06.2017

Peter Rayney lets us in on a technical conversation with an anonymised OMB client about its proposed share options. Understand the considerations facing OMBs wishing to implement employee share options where an EMI scheme is not possible. Seb was tasked to explore the most tax-efficient way to achieve this. I know that we would want to steer clear of these new fangled employee shareholder share arrangements since our IT specialists will not want to give up any employment rights.

corporation tax relief emi options

Plus, we want to use options. What would you advise us to do? There is no tax charge on the grant but, unlike your EMI options, employees would suffer an income tax charge when they exercised them. This would be based on the market value of the shares at that point. Do we have to tax that under PAYE and are NICs due? This might happen where, for example, the shares are about to be sold and can be realised into cash.

It would therefore be much better if the employees were able to exercise their options freely within two or three years and before any prospect of a sale, since the value can then be based on heavily discounted minority holdings. The company could also provide interest-free loans to the employees to enable them to acquire the shares. These loans would not count as a taxable benefit since any interest charge would be tax deductible.

Say it with shares | Tax Adviser

Yes, there would be a small amount of income tax to pay but the company may be able to assist with that. Anything else to consider?

The problem is we cannot say for certain whether standard ordinary shares like yours, with pre-emption restrictions and the like, are likely to be restricted. By making the election the employee agrees to pay tax on that higher unrestricted value — so there may be a very small additional income tax liability on the exercise. The important point is that this ensures that all future growth in the value of the shares will be subject to CGT.

Now this would be beneficial so long as CGT rates remain below income tax rates, which we would expect to be the case. Do we send that to the HMRC? The election must be made within 14 days and is retained by the company.

HMRC may ask to see the section elections during an enquiry or to ensure that there is no income tax charge arising on a later sale. So you should keep them in a safe place.

Topical Tax: Corporation tax deductions and EMI. By Paula Tallon | AccountingWEB

You might therefore consider obtaining an appropriate share valuation when the options are about to be exercised. This will ensure consistency — both the company and the employee would use the same value. What about our EMI options? Presumably as the employees do not suffer any tax charge on exercise, there is nothing for the company to claim relief on. The company will be able to claim tax relief when the EMI options are exercised even though there is no income tax charge for the employee.

The value of this tax relief is likely to be a very significant asset on any future sale and you should try to retain as much of it as possible when negotiating the sale consideration.

You mentioned something about CSOPs. Could they help us?

Generally the main restriction is that CSOP options can only be exercised after the third anniversary of the grant. If you go down the CSOP route, you will have to draw up formal scheme rules, but it is no longer necessary for them to be pre-approved by HMRC. However, to qualify for the favourable tax treatment, CSOP options must be notified electronically to HMRC.

If you want to pursue the CSOP route, I would be happy to come along to your next board meeting to run through the details. I can see that there are some attractions of going down the CSOP route. And they should avoid any income tax on exercise I like that. Joshua, can you take this forward for me? Peter advises owner-managers, accountants and lawyers on company sales and buy-outs, company reconstructions, business incorporations and the full range of OMB tax issues.

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