If you read nothing else, read this…
- Many large employee share plan payouts are expected this year.
- Good employers will ensure staff are informed about the possible tax implications.
- Gains of more than £11,000 can be mitigated in three key ways: transfer to a spouse, to an individual savings account or to a self-invested personal pension.
This year, employees at BT, BSkyB and Whitbread have got their collective hands on shares worth tens of millions of pounds. Because share prices have been climbing steadily since the market bottomed out five years ago, big gains are due for many more workforces saving into three- and five-year approved employee share plans, such as sharesave and share incentive plans (Sips).
But this sweet prize could leave a sour taste if employers do not take the time to educate staff about the tax implications of taking this new-found wealth. Here are seven points to consider.
1. Capital gains tax (CGT) could be payable on gains
Jeanette Makings, director, financial education services at Close Asset Management, says: “Staff have to remember that if they want to use the capital they have built up, they will have to liquidate the asset at some point. They pay tax only on a bit of the wealth they have created, not all of it.”
In sharesave, CGT is based on the difference between the price of shares at exercise and the price at which the options were bought (also see point 2).
With a Sip, if an employee buys and sells the shares on the same day, they will not generate CGT. Sip shares can be exited at any time, but staff should be directed back to the plan rules so they are aware of the implications of exiting before the shares are fully tax-free.
2. The need to pool shares
To calculate a share gain, staff need to use an average base cost of all their shares. This applies when they own the same-class shares in the same company bought at different times.
Inez Anderson, tax partner at Smith and Williamson, warns: “It is important for staff to remember that it is not just the shares they have just acquired. The pooling aspect can be quite complex, so it would be worth talking to a tax adviser.”
3. Capital gains tax allowance is £11,000
Above this amount, CGT is charged at 18% (lower-rate taxpayers) and 28% (higher-rate and above taxpayers).
Anderson warns: “In rare cases, someone who pays the 20% income tax rate could sell shares and, because the gain is added to their income, they could go up into the 28% CGT rate.”
Gains of more than £11,000 can be mitigated in three key ways: transfer to a spouse, to an individual savings account (Isa) or to a self-invested personal pension (Sipp).
4. Transfer shares to a spouse or partner
If an employee has a spouse or partner who has not, and will not, use their own full CGT allowance within a tax year, that employee can opt to transfer shares to their spouse. In this way, up to £22,000 of gains can be protected from CGT.
5. Transfer shares into an Isa
The 2014/15 Isa investment limit will be £15,000 a year from 1 July 2014. Shares must be transferred within 90 days of exercise. Staff need to inform their Isa provider that it is an employee share plan in order to maintain the tax wrapper on the shares. If the 90 days fall over two tax years, they should be able to use an Isa in each year.
Close Asset Management’s Makings says: “Quite a lot of people who want to realise gains will wash it through an Isa so they won’t have to pay CGT on that amount.”
6. Transfer shares to a Sipp
As with Isas, a Sipp protects share gains over the £11,000 tax-free CGT limit and the transfer needs to be done within 90 days. High earners and those with large share gains should note that the annual allowance for tax-free pension contributions is £40,000 and the lifetime allowance is £1.25 million.
7. Be aware of the impact of dividends
Employees earning just below the higher-rate income tax bracket need to be careful that any dividend payouts do not take them into the next tax bracket.
Phil Ainsley, managing director, employee benefit solutions at Equiniti, says: “Although that probably wouldn’t be known until [the employee] has to do a tax return at the end of the year.”
Staff with big share gains should consider the cum-dividend (cum-div) and ex-dividend (ex-div) date of shares before exercise. This is when a declared dividend belongs to the seller rather than the buyer. The share price is normally higher cum-div and lower ex-div.
“I would not transfer the shares into the Isa until after that cum-div date has been paid, so I can get a few more shares into my Isa,” says Ainsley.
