When employees are given shares for free or they pay less than the market value of the shares, they must pay tax on the discount they have received.
Where EMI or CSOP are used, this tax bill may not arise provided the amount the employee pays when they choose to exercise their option (ie turn it into actual shares) is not less than the value at the date the option was granted.
Under EMI and CSOP the value of the shares at the time of grant can be agreed in advance with HMRC. This gives the employer and the company certainty in the future as HMRC will not subsequently seek to argue that the shares were worth more than agreed and therefore that the employee has an unexpected tax liability.
A valuation report should be prepared for the company, setting out:
- The Unrestricted Market Value (“UMV”) of the shares, which is the value of the shares with no restrictions in place
- The Actual Market Value (“AMV”) which is the value of the shares with restrictions in place such as limitations on the transfer of the shares.
The valuation for tax purposes is usually much lower than a valuation for commercial purposes. This is because a tax valuation takes into account elements such as discounts for minority interests which would not be applied in a commercial context.
There are several ways of considering the value of the options including multiples of maintainable profits, discounted future cash flows and net asset valuations. HMRC will take into account factors including:
- The price at which any recent share sales took place;
- The value of any offers which have been received from third party purchasers;
- The rights attaching to minority shareholdings;
- Restrictions on shares such as forfeiture risks
Allegro Tax can undertake valuations for EMI and CSOP purposes and liaise with HMRC on your behalf. Make a free enquiry here.
