Partly paid shares

By Tolley in association with Andrew Rainford
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The following Employment Tax guidance note by Tolley in association with Andrew Rainford provides comprehensive and up to date tax information covering:

  • Partly paid shares
  • Commercial considerations
  • Income tax treatment on acquisition of the shares
  • Tax treatment on disposal of the shares
  • PAYE and NICs on nil paid shares
  • Implications for CGT: entrepreneurs relief
  • Company law issues
  • Accounting issues

This note considers the taxation of partly paid shares and the tax treatment of shares acquired on deferred terms. Although they have a very similar tax treatment they have different legal effects and commercial implications. In essence both types of arrangement involve acquiring shares and paying for them at a later date.

Nil paid or partly paid shares ― these are shares that are issued as new shares by the company to the employee on terms that they must be paid up at later date. The shares must be paid up if the company makes a call for the outstanding subscription price.

Shares acquired by payment on deferred terms ― these are existing shares that are transferred to the employee by a third party but where the purchase price is left outstanding as a debt owing to the vendor. However, the shares have already been paid up and so are not subject to a call from the company.

Commercial considerations

Why consider a partly paid or deferred terms arrangement? Its prime use is where it is thought desirable for an employee to acquire shares in the company on the same terms as other shareholders, but where the employee does not have cash available to pay for the shares. As a result, the employee is at risk to the extent of the current market value of the shares. Any future growth in value would normally be subject to capital gains tax (so long as none of the other provisions of ITEPA 2003, ss 417–554 (Pt 7) apply to the shares). If the shares fall in value, the employee remains obliged to pay the initial market value of the shares. See Example 1. It should also be noted that if the company enters liquidation, the liquidator is likely to pursue the call the company has on the amounts due.

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