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06 Dec 2019 Legislation Tips and tricks

Employee share schemes

Offering employees shares in a business can be a great way to align interests and to recruit, motivate and retain staff.

Simply transferring shares to employees is rarely the best solution, however. Not only does this dilute existing shareholdings but, from a tax perspective, the difference between the market value of the shares and the price paid by the employee is normally taxable as employment income. This can lead to a major tax liability for the employee before they have even realised value in the shares.

There are similar tax implications of granting employees options over shares in the company (i.e. giving the employee the right to buy shares in the company at a certain price at some point in the future); generally, the employee will be taxed on the difference between the value of the shares when the option is exercised and the exercise price.

Partially as a result of these issues, a few different types of tax-efficient share schemes are available to certain (often small, fast-growing) companies in certain circumstances.

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