Rewarding employees – be aware of the tax risks if you are gifting shares!

Date posted: 15th Dec 2021

Given the ongoing shortage of employees that appears to be facing every sector in every industry, there can be a temptation to simply gift shares in the employing company to employees to retain loyalty, particularly within a family owned business. However, simply gifting shares can pose tax issues for:

  • The individual who receives the transfer or issue of shares.
  • The individual who is ultimately diluting their own shareholding either via a transfer of already existing shares or by arranging for the company to issue new shares to the employee.
  • The company in terms of reporting required and possible national insurance charges depending upon the marketability of the shares.

The issue in the first circumstance is that the individual who is receiving the shares, is likely to be receiving those shares in their capacity as employee. This means that there is a risk of a tax charge under the employment related securities regime and disclosures are required to be made to HMRC. Whilst giving away say 1 share out of 10,000 shares in issue, may appear to mean that any tax charge is based on 0.01% of the company value, this is not necessarily the case, particularly if the individual begins to receive dividends from their shareholding which is likely to mean that the shares are worth more than a simple percentage of the company’s value.

In the second circumstance, the individual either gifting shares directly or diluting their shares by the issue of new company shares, may face a personal capital gains tax charge on the deemed sale of their shares, despite not receiving any monies. Such a gain will need to be reported to HMRC and the individual may face penalties for non-declaration/non-payment of any tax.

Finally, the company will need to report any share transactions by 6 July following the tax year in which the employee receives the shares. There can be late filing penalties for not completing the appropriate paperwork. In addition, the company may be subject to national insurance charges as an employer.

A more tax efficient route is to use an Enterprise Management Incentive (“EMI”) scheme whereby a) the value is agreed up front with HMRC and b) a less than 5% shareholding can qualify for business asset disposal relief (previously known as entrepreneurs relief). Further consideration on EMI schemes is available at https://www.cliveowen.com/2021/09/staff-retention-is-it-time-to-use-an-emi-scheme/

In addition, there are a number of commercial considerations too, which should be considered well before any paperwork is signed!

As ever, if you have any queries, please contact our team here. 


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