Employee Incentives: incoming changes

Sean MacKenzie

Although the 2015 Budget contained no new announcements that will materially impact Employee Incentives arrangements, it is worth highlighting some of the legislative changes previously announced that will soon be enacted, or which are now becoming particularly relevant.

If you have any questions in relation to anything below, or Employee Incentives generally, please contact our Employee Incentives team.

Internationally Mobile Employees

Position before 6 April 2015

Presently, the way that the UK taxes share options held by internationally mobile employees is out of step with the majority of other countries.  While the rules are complex, the most determinative factor is whether an employee is UK resident at the time an option is granted.  If they are, then on exercise of the option it will be subject to tax in the UK.  If they are not, then the exercise of the option may not trigger tax in the UK. (However, this basic position may be affected by the application of double taxation treaties between the UK and other countries.)

Position from 6 April 2015

Whether an employee is UK resident at the date of grant of an option will no longer be the decisive factor for whether an employee are subject to UK tax on the exercise of that option. Under the new provisions, only a proportion of the option gain may be taxed in the UK. This proportion is generally based on the amount of time spent living and working in the UK during the vesting period of the option.

The aim of these new provisions is to align the way that the UK taxes options held by internationally mobile employees with the system employed by the majority of other countries (and the vast majority of OECD member states).

Changes to the definition of Market Value for Shares in a Listed company

Earlier this month, Regulations that will change the definition of ‘market value’ for capital gains tax purposes for shares admitted to the Official List were enacted, with the changes to come into effect from 6 April.

The new provisions are designed to align the legislation with most companies’ practice.  As a result of the Regulations, ‘market value’ will be based on the closing mid-market price of a share on a trading day.

Companies that have an ‘old’ definition of market value embedded in the rules of their share plans might wish to update this definition for clarity’s sake.

Decrease to the Official Rate for loans to employees

It is not uncommon for companies to make loans to employees or directors (whether for the acquisition of shares in the company or otherwise).  However, the trap for the unwary is that unless interest is charged on the loan at a rate that is at least equal to the Official Rate published by the Treasury from time to time, the loan may be subject to tax (unless one of some very narrow exemptions applies).  At present, the ‘official rate’ for these purposes is 3.25%.  With effect from 6 April 2015, this rate will fall to 3%.

In other words, from 6 April 2015 loans made to employees where interest is charged at a rate of 3% or more will not give rise to a tax charge.

 Annual Returns for Employment Related Securities

It’s that time of year again; annual returns for employee share schemes need to be submitted to HMRC by 6 July 2015

This year represents the first year where annual returns will need to be submitted online, via HMRC’s Employment Related Securities portal.  Companies operating tax advantaged plans (i.e. Enterprise Management Incentives (“EMI“) plans, Company Share Option Plans (“CSOPs“), Share Incentive Plans (“SIPs“) or Save As You Earn (“Sharesave“) plans) must register such plans before 6 July 2015 in order to preserve the available tax advantages.  The annual returns in respect of CSOPs, SIPS, Sharesave and EMI plans will also need to be filed online before that date.


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