Issuing shares to employees – don’t forget s431 elections
Employment related securities is probably one of the most tortuous areas of tax legislation. Contained in ITEPA 2003 it should be considered each and every time shares are issued or value shifts into shares by reason of a transaction. Broadly, employment related securities are shares received by reason of an employment and it is probably safer to assume that any shares that someone receives from a company whilst they are a director or employee of that company will be regarded as employment related.
Failure to consider and make a s431 election could prove a costly mistake later. A s431 election is a joint election made by an employee and the company to ignore the restrictions applying to shares when they are issued to an employee.
To give a common example, the actual market value (AMV) of a share may be reduced by certain restrictions in the Articles of Association, such as transfer restrictions or good and bad leaver provisions. The actual market value may be say 10% lower than the value of the shares ignoring the restrictions (the unrestricted market value (UMV)).
Why make the election?
This could protect against income tax charges on the difference between AMV and UMV on a sale. In this example, failure to make the election could see 10% of the proceeds taxed as remuneration on a sale. That could be a considerable amount and be quite unexpected for the vendor and lead to questions being asked of the advisors.
What is the effect of the election?
Making the election treats the employee as receiving the shares at their UMV. If they don’t pay the UMV on acquisition then they suffer an income tax charge (and possibly National Insurance) on the difference between UMV and the price they pay for the shares. But by making the election they should protect against income tax charges on a sale and lead to a disposal purely subject to CGT.
We are aware that spotting the failure to make s431 elections is somewhat of a sport for due diligence teams on a sale and has resulted in large PAYE liabilities arising.
In conclusion, where employees are issued with shares always remember to consider s431 elections. Contact Craig Simpson firstname.lastname@example.org for help with clients who may be issuing shares to employees.As always, you are reminded that this article is generic in nature and you should take no action based upon it without consulting your professional advisor.