Tax Free Share Ownership Plan

Joey122

Hi All,

My company has confirmed that we can do the following:

Take our bonus and buy company shares and if held for five years they are completely tax free - ie income tax and CGT free as well as the entire bonus is invested tax free with no tax. SO that means tax saving on income tax when first invested and also reinvested.

How does this work in principle - What tax rule are they playing here?

ANybody know?

Murdina

This will be (or should be) a special scheme they have set up for employees to take advantage of various tax rules designed to encourage employees to invest in their employer. Your employer should be able to tell you exactly which kind of scheme it is and point you to how the tax savings work (often an outside firm will have set up all the documentation for them).
If it looks a bit less formal than this (perhaps you work for quite a small company) then quiz them in a bit more detail just to make sure it is all it seems. One key point is what happens if you leave the company before the 5 years are up - could you lose the tax benefits? (I've dealt with these schemes professionally in the past, but a good while ago, so am not totally up to date with current details - but the leaver issue certainly could be a problem with some schemes).

DRS1

http://www.hmrc.gov.uk/shareschemes/sip-info-employees.rtf

This is a booklet from 2005 which explains the sort of plan I think they have in mind - you will see there are limits on the value of the shares you can get in any year through such a plan. Do they look right in the context of the bonus you are expecting?

Joey122

Yes,

This document describes things - However one question which I dont understand:

If I remove the shares after one year do i pay income tax if I move it to an ISA or a pension?

Murdina

I don't know what the rules are of your scheme as I say above but I cannot think of a situation where the destination you remove it to stops it being liable to income tax because it is either not an approved scheme or you have taken shares out of an approved scheme too soon. Of course a pension contribution might be a way of negating the income tax cost.

DRS1

There is some detail aboout halfway through the booklet on taking shares out early - covering whether that is possible and what the tax consequences are. Even if you can take the shares out after one year you are going to have an income tax and NIC charge (see the table). As Murdina says you may be able to cancel that out with a pension contribution.

Why wouldn't you just leave the shares in the plan for the full five years, though? If you don't think you will be there for that long perhaps you'd be better off just taking the cash in case the reason you leave means you forfeit the shares entirely. That depends on what sort of shares they are (partnership shares can't be forfeited I believe). Anyway it would be worth checking that out before you go in for this plan. It can be tax efficient if it all works out but it can bite you if you're not careful.

Joey122

I might not be there for the full five years

Interestin stuff this - The question is can my employer block this?


Can I put my shares into an Individual Savings Account (ISA)?

Yes. You can transfer your shares directly into the stocks and shares part of an ISA, as long as you do so within 90 days of taking them out of the plan. The transfer is free of CGT.

The market value of the shares at the date of the transfer counts as a subscription to your ISA. This means that this market value, together with any cash subscription you make during the same tax year, cannot exceed the ISA subscription limit.

Joey122

Is there anything stopping you from taking your bonus tax free , buying these shares moving them to your ISA and them closing down your iSA.

That means you pay 0 tax?