Companies who seek to reward and incentivise employees may wish to do so with shares rather than cash bonuses. Where shares are issued to an employee for free (or below the current market value) there will generally be significant tax consequences.

This is because where shares are simply issued or transferred to employees for no consideration, or for less than their market value, the employee will be subject to income tax on the market value of the shares less what they paid for them.

Furthermore, there could be Capital Gains Tax or Inheritance Tax implications for the person issuing the shares.

However, there are key benefits to issuing shares to employees:

  • Provide incentives to employees to strive for better performances
  • Attracting and retaining staff, particularly in start-ups, where companies may have insufficient funds to provide salaries in line with market leaders
  • Enhancing remuneration packages if it remains tax efficient
  • Succession planning for major stakeholders
  • Raising equity funding

Minimising costs to the employer

A good way of minimising costs when issuing shares to an employee is via an EMI scheme. EMI options are the preferred standard for share rewards, being flexible and having advantageous tax rates. In many cases, other share rewards are only used where an EMI is not an option.

However, care must be taken to demonstrate that the intention was to retain and motivate the employee and not solely to provide a tax benefit.

The main tax benefits which can come from utilising an EMI scheme are:

  • The company obtains a corporation tax deduction on the difference between the £nil exercise price and the market value at the time of exercise.
  • The company and share valuation can be agreed in advance with HMRC. This removes the possibility that HMRC will later argue a different value.

Ultimately, whilst gifting shares to employees is often viewed as a simple matter, doing so can give rise to tax liabilities as well as reporting obligations.

An EMI scheme is not the only option when gifting shares, and there are many other avenues to consider. Therefore, it is important to always seek expert advice tailored to your own circumstances when considering gifting shares to employees.

As always, if you would like any further information regarding the above, please feel free to contact our offices by email