The tax implications of giving an employee shares in a company

If your business is considering an allocation of shares to employees, you may already know about Unapproved, "KEEP" and Approved share schemes.

Do these share schemes work? In our view they only work for large employee pools or shares of modest value. Large and SME companies issuing equity to key individuals/investors, will find that these schemes are not fit for purpose.

The upfront income tax costs are prohibitive or the scheme rules so restrictive that the arrangements are unusable.

Our Deferred Share Award and "Management buy-in" schemes make share options viable by reducing the upfront tax cost by 90% (or more).

A deferred share award scheme assimilates tax-efficient measures into an ordinary share allotment to counter the tax exposures that would otherwise arise.

Ordinary share schemes trigger income tax, USC and PRSI at rate of up to 50% on the value of the shares given.

The deferred share award scheme eliminates up to 90% of the tax charge. This is achieved with clever legal drafting and the application of legal yet unobtrusive restrictions.

The scheme best suits companies where a holding period of three years is expected.

An alternative solution to the significant tax cost associated with allocating shares is the use of "Management buy-in" shares.

"Management buy-in" shares are structured so that their value may be adjusted in reference to the value of other company shares.

These shares attract extremely favourable tax treatment as a consequence of their structure with savings of up to 95% achievable.

At the same time, the ability to regulate value provides a strong commercial incentive for holders of shares to meet business targets to ensure future capital growth.

An unapproved share option scheme is the name given to any scheme made available to all employees without formal notification to Revenue.

Awards that must be exercised within 7 years trigger income tax, and PRSI on the difference between the option price and the market price when the option is exercised.

The tax liability must be paid within 30 days after the date of the exercise.

These share schemes are not tax-efficient and are onerous to implement.

The tax advantage of KEEP share schemes is that no income tax, PRSI or USC arises on exercise. The tax liability arises instead on the date of disposal in order to match the timing with the employee having funds.

There a many complex rules for accessing this tax treatment and take up has been poor.

The company must be unquoted although companies listed on the Enterprise Securities Market of the Irish Stock Exchange may qualify. The company must have less than 250 employees, an annual turnover below €50m and a balance sheet value less than €43m.

Approved Profit Sharing Schemes allow employees to convert bonuses into shares in their employing company or its parent free of income tax.

The 'salary forgone' cannot exceed 7.5% of basic salary although individuals may supplement this amount from own resources.

There is an annual limit on the value of shares which can be appropriated of €12,700 per employee. This can be increased to €38,100 in certain situations.

Shares must be held in trust for three years to access tax-free treatment.