Market value of shares subject to restriction on sale
The First-tier Tax Tribunal has ruled that the valuation of shares acquired by an employee, which were subject to a restriction on sale, should be reduced to take that restriction into account for the purposes of calculating the employee’s income tax liability.
The case concerning an employee of BNP Paribas who received shares worth approximately £144 000 on termination of his employment, brought to light issues regarding share valuation. Although the documentation produced to the tribunal was not complete or particularly clear it found that the shares were subject to a restriction on sale. In those circumstances, the market value of the shares (for tax purposes) should take into account the restrictions.
What does this mean for my company?
The decision itself is not particularly surprising given existing guidance from the UK tax authorities (HMRC) on how restricted shares should be valued for tax purposes. Over the last few years, it has become increasingly common for shares held by employees to be subject to a post-vesting retention period, particularly in the financial services industry due to regulatory requirements. In the above case, BNP Paribas withheld income tax on the full market value of the shares without any reduction for the restrictions, which is more than likely the approach many other companies currently take. The decision shows that in those circumstances an employee may be able to claim an income tax rebate through his/her self-assessment tax return.
The issue that the tribunal did not address was the possibility of a further tax charge under the tax legislation when the shares ceased to be restricted (both the taxpayer and HMRC failed to raise this). In order to avoid the possibility of future post-acquisition tax charges, and any arguments over the valuation of the shares, it is possible for employees to enter into a tax election (section 431 election) by which the employee chooses to be taxed on the unrestricted value of the shares.
Employers in similar circumstances should therefore consider whether they will require employees to enter into such a 431 election as part of their normal vesting or exercise process.
In addition, the decision emphasises the need for full and complete record keeping in relation to employee share plans. The lack of proper documentation evidencing the taxpayers’ rights under the share plan created additional uncertainty in determining what the tax treatment of the shares should be.
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