Changes to tax on shares less than market value
Employers may award shares on a nil or partly paid basis to employees. For tax purposes, the amount unpaid for the shares (i.e. the undervalue) gives rise to a "notional loan" benefit-in-kind charge (reportable on form P11D) whilst any amount unpaid remains outstanding. Additionally, if the employee sold the shares, without having paid the amount outstanding, an income tax charge would arise on the amount of the "notional loan" outstanding. This Income Tax charge on discharge of "notional loans" could operate unfairly on the employee in certain cases. For example, (i) if the employee used the sale proceeds for the shares to discharge the unpaid amount, or (ii) if the employee sold the shares on terms that the liability to make payment for the amount outstanding transferred to the purchaser, and the purchase price reflected the transfer of the liability.
The proposed changes in the Finance Bill amend the terms on which a "notional loan" will be treated as discharged. This means that if the employee acquired shares on terms that he is liable to pay the amount outstanding, no "notional loan" tax charge will arise if the employee sells the shares and uses the sale proceeds to discharge the unpaid amount. In addition, no tax charge will arise if the employee sells the shares on terms that liability to pay the unpaid amount transfers to the purchaser, and the purchase price reflected the transfer of the liability.
The proposed changes improve the tax treatment of employers awarding nil or partly paid shares. This is due to the removal of a potential tax charge that might apply unfairly at the time employees sell nil or partly paid shares. It is expected the changes will apply from Royal Assent to the Finance Act.
After enactment of the changes, there will be greater flexibility over the offering of share awards under a Deferred Share Purchase Plan (DSPP). In particular, improvements to the terms on which DSPP participants may be obliged to pay for any unpaid amounts, or to transfer shares subject to unpaid amounts (such as to an employee benefit trust) on cessation of employment.
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