Share Questions

Consequences of granting NTA options

No IT or NICs

Tax consequences on exercise of NTA options

IT charge based on the diff between MV at exercise less exercise price

What is the quirk with being issued options in AIM listed company?

They will be considered RCAs

Tax consequences of RCAs on exercise?

Class 1 NICs due on diff between MV at exercise and amount paid . If the employee is required to pay this then it can be deducted from the amount chargeable to IT.

Explain PAYE implications of RCAs

PAYE must be operated. If PAYE > cash pay then pay is reduced to 0. Employer will then meet liability and seek recovery from employee.

The employee must reimburse ER for tax deducted no more than 90 days after end of TY in which charge arises. Any amounts after this become a taxable benefit, any tax not recovered is also treated as earnings for Class 1 NICs for the earnings period.

Tax implications on sale of NTA options in AIM listed company

CGT payable.

Base cost = exercise price + amount charged to IT + ER NICs paid by EE

BADR not available so CGT payable at 24%

Tax consequences on grant of EMI options

No IT or NICs

Tax consequences on exercise of EMI options issued at discount?

IT is payable on the difference between the lower of MV at grant and MV at exercise less the exercise price

When are Class 1 NICs and PAYE applied to EMI options?

If there are arrangements in place at exercise to sell the shares

what is the quirk with BADR on EMI options?

no requirement for the 5% rule.

What are requirements for an employee to be eligible for EMI?

Must work at least 25 hours per week or spend at least 75% working time at the relevant company.

What would happen if the working hours requirement for EMI ceased?

Disqualifying event —> Tax advantaged status only retained if options are exercised within 90 days of failing to meet requirements

Tax charges on sale of disqualifying EMI shares?

Tax charge on normal EMI

Tax charge on increase in share value between date of disqualifying event and date of exercise.

What is nornal treatment of shares under ITEPA s425(2)

A charge to IT on earnings does not arise on acquisition of a forfeitable security where that forfeiture restriction will cease within 5 years after the date of acquisition

Taxable gain as normal when restriction lifts

What difference does an election under s425(3) make compared to s425(2)?

Charge an amount now based on the value and then the remainder based on the value when the restriction lifts

What difference will an election under s431 make?

Charges UMV now

Reasons for / for not making s431

For = shifts increase to CGT

Against = have to pay now and no relief if does have to forfeit

Tax implications on issue of convertible shares?

Taxed on the value of shares ignoring the conversion right to get a benefit in kind

Tax implications on conversion of shares?

Treated as if you had sold original shares for value with no conversion rights and this becomes the base cost for the new shares

BIK arises on the new shares of diff between MV and base cost

BAse cost of the new shares on a future disposal will be the amount charged as BIK on issue and the conversion

What is the condition of free shares?

Issued up to £3,500 pa

NAme types of SIPs

Free shares, partnership shares, matching shares, dividend shares

What re the rules with dividend shares in trust being taxed?

In trust < 3 years = divi tax when removed

In trust 3-5 years = no tax

In trust > 5 years = No tax

Rules with SIPs in trust being taxed?

In trust < 3 years = BIK on MV on removal

In truast 3-5 years = BIK on lower of MV at award and MV on removal

In trust > 5 years = no tax

Benefits of CSOP?

Do not have to include all employees

When is income tax relief available for an existing shareholder?

If the shares held were acquired as part of issue qualifying for EIS or are subscriber shares

What is the condition for income tax relief and being connected company?

For IT relief the investor must not be connected with the company within 2 years before issue of shares and 3 years after the issue of shares

When is an investor connected with a company?

If they hold more than 30% of the company’s ordinary share capital

What are tax implications of an EIS holder becoming connected?

Income tax relief is withdrawn and IT relief will not be available for further subscription

What is the qualifying time period for deferral relief to apply?

1 year before the gain and 3 years after the gain arose

Is a business partner associated for CGT purposes?

Yes

Can you claim income tax relief via EIS even if you become connected by employment?

Yes but only if certain conditions are met

What are the conditions with claiming income tax relief via EIS even if you become connected by employment?

A = remuneration is reasonable

B = director has no connection at the time when the shares were issued

If B is not met then C = shares issued before the termination date for the latest share issue which did meet condition B

Does the definition of associate include siblings?

No

What happens to IT relief under EIS where a company goes into liquidation?

HMRC will not withdraw relief but if any distribution is received from the liquidator then this results in a partial withdrawal of relief.

What are the options when you make a loss selling shares?

Capital loss can be offset in gains arising in the year or carried forward for 2 years

What happens if you take a loan from a company in which you receive EIS shares from?

Receipt of loan will be treated as a return of value within the period of restriction and the shares are treated as ceasing to be eligible at the date value is received.

How can the withdrawal of EIS relief be avoided where a company has provided a loan to shareholder?

If company receives replacement value e.g. disposal of an asse to the company for less than MV or purchasing asset from company for more than MV

Or making a payment to company (i.e. repaying loan)

What is relief for subscribing in VCT shares?

Lower of amount subscribed for, and £200k

Diff between VCT and eIS relief?

VCT relief is always in TY of subscription (cannot be carried back)

Are VCT dividends tax exempt?

Only the first £200k subscribed for

What is qualifying VCT?

quoted company with at least 80% of investments qualifying

What are the max value of shares that can be given: free shares, partnership shares, dividend shares and matching shares?

Free = £3,600

Partnership = £1,800

Matching = £3,600

Dividend = no max

How does SAYE work?

Employees make monthly savings and then use cash to purchase shares in employer

Does an employer have to include all employees in SAYe?

Can exclude employees/directors with less than 5 years service

What can the SAYE discount be?

No more than 20% of the share value

How long is a SAYE period?

3 or 5 years

What is max amount you can save under SAYE?

£500 per month

Can you exercise SAYE if you are leaving?

Some schemes do if you have held option for 3 years

What is the tax on exercise of CSOP shares?

CGT - no IT in a CSOP where option is exercised between 3 and 10 years after grant

Name EMI conditions

Trading co with PE in UK carrying on qualifying trade

Gross assets cannot exceed £30m

Company must have fewer than 250 full time employees

Employees working 25 hours a week

Value of an employees shares cannot exceed £250k

Value of shares granted by company cannot exceed £3m

Tax treatment on shares w forefeiture?

Charge on lifting of restriction

No charge on acq is forfeiture ceases within 5 years

What is tax charge on exercise of EMI options?

Lower of MV at grant or MV at exercise * number of shares

Less price paid

Subject to IT

What if there is a disqualifying event for EMI?

Option exercised within 90 days = tax adv preserved

If not then tax charge on exercise on increase in value between disqual event and date of exercise.

What is s423(2)

shares subject to forefeiture and will revert back on happening of certain event

What is s432(3)

Restrictions on when shares can be sold

What if forfeiture will cease within 5 years?

No charge on issue

Charge when restriction lifted on % of value

What election can you make on forfeiture shares?

Election to charge on initial award

What does s431 do?

Ignores all restrictions attached - on award IT charge on UMV less amount paid

What is charge on forfeiture lasting more than 5 years?

On award = No. shares * restricted value —> calculate %

Charge on lifting = % MV no.shares

Tax charge on acq of convertible securities?

Depressed value of shares

Less amount paid

What is tax charge on convertible securities?

Gain realised

Less expenses incurred

Less amounts paid to convert

What is the gain realised on conversion of securities?

MV of ‘new’ securities on acq

less MV of original securities before CE

less consideration paid by EE for conversion

Tax charge where shares have been increased by non-commercial actions?

MV on valuation date

less MV if non-commercial increase was disregarded

When do securities cease to be ERS?

7 years after cessation of the employment

What factors do HMRC look at in deeming earn out as employment income?

Sale agreement failing to demonstrate it as consideration

Vendor not fully remunerated for continued employment

Condition on future employment beyond reasonable requirement to stay

PErsonal performance targets

Non/former employees not offered earn out on same terms

Shares restricted - what happens at the point the restriction expires?

Tax charge on proportion of UMV which has been neither taxed nor paid for calculated by: (discount / UMV)

When do you pay tax on expiration of forfeiture where forfeiture lasts within 5 years?

If no tax is paid on acquisition or no consideration paid.

When does a s425(3) need to be made by?

Within 14 days of acquiring the shares

Effect of s425.(3)

Pay tax on MV of shares taking into account the restriction

If there is a loss on EIS shares what should an additional tax rate payer do?

Make a claim under s.131 for the loss to be set against his other income in the year

Implications of shares not qualifying for EIS?

No IT relief, however CGT deferral on the investment can be set against gains made in the qualifying period.