I work in a leading bank and my husband in a small building society, neither of which provide independent investment advice. The bank currently offers a staff share scheme and the building society says it is about to. Can you tell us what we need to know?
There are various shareaward and share-option schemes available, including tax-advantaged and taxed (approved and unapproved) plans. HM Revenue & Customs’ tax-advantaged (approved) schemes are a tax-efficient way of offering employees company shares.
Share purchases allow employees to save money to buy shares and buy shares for a small deposit, paying the rest at a later date. Share options pose no financial risk because if the market value is less than the exercise price, you do not have to exercise the option and you will
get your money back.
However, there may be some disadvantages:
- If the business runs into difficulty you may lose the value of your shares.
- Sometimes you may be expected to take a lower salary in return for shares.
- You may have to stay with the company for a certain period to qualify.
- Leaving before the period specified in the plan means you lose any options/shares and may have to repay National Insurance contributions (NICs) and income tax relief.
- You have to pay income tax and NICs when they acquire shares in a taxed (unapproved) scheme even if there is not enough money to do so without selling some or all of the shares.
- Income tax and NICs must be paid each time a restriction is changed or removed if shares in an unapproved scheme carry restrictions.
However, I know the bank offers an HMRC-approved scheme and therefore you do not pay income tax or NICs when you acquire the shares.
Interestingly, the Supreme Court recently provided tax guidance that clarifies how the market value of shares for employees is calculated.
The significance of this dispute is that if shares are acquired from employees for more than their market value, that excess amount is subject to income tax and NICs which must be accounted for by the employer under PAYE rather than the more favourable capital gains tax regime.
The ruling is useful as capital gains tax schemes become more important as there are less of them and there is a need for properly drafted arrangements to give employees additional rights on exits or achievements of targets. These rights should be included in the articles of
association rather than being expressed as personal rights.
Your husband’s building society may be thinking about creating a new type of mutual share called mutual ordinary deferred shares to help it raise funds while retaining its mutual status. These shares provide an alternative to issuing the profit-participating deferred shares which several
building societies used to strengthen their balance sheets during the recession.
If you join your respective employers’ share schemes, this will allow you to benefit from the successful businesses you are helping to create. I have looked at both financial services companies and advise you to join the schemes when they become available.