Partly paid shares

Produced by Tolley in association with Andrew Rainford
Partly paid shares

The following Employment Tax guidance note Produced 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
  • Loans of less than £10,000
  • Interest relief
  • Employee control shares
  • Death or seven years post-employment
  • Restricted securities provisions
  • Disguised remuneration
  • Tax treatment on disposal of the shares
  • More...

This note considers thetaxation of partly paid shares and thetax 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 thecompany to theemployee on terms that they must be paid up at later date. The shares must be paid up if thecompany makes a call for theoutstanding subscription price.

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

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 thecompany on thesame terms as other shareholders, but where theemployee does not have cash available to pay for theshares. As a result, theemployee is at risk to theextent of thecurrent market value of theshares. Any future growth in value would normally be subject to capital gains tax (so long as none of theother provisions of ITEPA 2003, ss 417–554 (Pt 7) apply to theshares). If theshares fall in value, theemployee remains obliged to pay theinitial market value of theshares. See Example 1. It should also be noted that if thecompany enters liquidation, theliquidator is likely to pursue thecall thecompany has on theamounts due.

As a result, this arrangement should only be used where it is acceptable for theemployee to be at risk in relation

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