The transfer of shares to an employee generally occurs in one of two ways; a gift of shares by existing shareholders, or an allotment of new shares by the company.
A GIFT OR TRANSFER OF SHARES
A gift of shares is generally unattractive for the existing shareholders if it will trigger a liability to capital gains tax (“CGT”) and it also has stamp duty implications for the employee. Since 1 January 2016 the rate of CGT applicable to disposals of shareholdings in trading entities is 20% on the first €1m and 33% thereafter.
Financing the CGT liability often requires payment of additional salary or bonus to the existing shareholders to put them in funds. Taking into account the marginal rates of tax and corporation tax this can be significant.
ALLOTMENT OF NEW SHARES BY THE COMPANY
The alternative to transferring shares is to simply have the company make an allotment of new shares.
The downside with this approach is that any allotment will have income tax implications for the employee under benefit-in-kind rules. In essence the individual becomes liable to tax on the market value of the shares allotted.
The tax exposure outlined above can be mitigated with planning and in particular through the use of restricted shares.
Provided that certain conditions are met the amount liable to benefit-in-kind is reduced by up to 60%. The amount of reduction depends on the period of restriction as follows:-
A partial or full claw back of income tax relief will arise if the restrictions are removed or if the shares are sold, except as allowed, before the end of the specified period.
In many cases, the use of restricted shares will significantly reduce exposure to income tax under benefit-in-kind rules. On any future disposal the base cost of shares for future CGT purposes is the value after adjustment for the abatement.
A company that awards restricted shares (or where a claw back event occurs) must deliver details of the award (or claw back) no later than 31st March each year.
A suite of documents is required for the implementation of the restricted shares.
It is important that appropriate measures are taken to protect the existing shareholders’ current positions and a shareholders’ agreement should be executed in tandem with the relevant documentation for the restricted shares.
When allocating shares to an employee among the issues to consider is how the shares should be treated upon the untimely death or incapacity of the employee. It is possible to make provision for these situations in the shareholders’ agreement and the cost of financing can be insured against using a life-insurance policy.
HOW WE CAN HELP
Should you wish to implemented a restricted share scheme we can help with the following:-
Advising on an appropriate share valuation for income tax purposes;
Calculation of pre- and post-benefit tax positions;
Preparation of letters of offer and acceptance, the trust documents and board minutes, agreements between the parties for the subscription for shares and restrictions;
Reviewing the proposed shareholders agreement and other documentation;
The filing of the relevant paperwork with the Companies Registration Office; and