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Monday, 26th February 2024
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Employee shares Back  
High-tech industries have lobbied for a low tax rate on share options and shares for key workers. The Finance Act has instead offered a tax deferral provided the shares continue to be held.
Shares and share options are popular with some employers as a means of rewarding employees. There is no immediate hit on the bank account, or, less certainly on the profit and loss account. Their attractions to a start-up company are obvious. They can be attractive also to an employee as representing a gamble that may yield great wealth if all goes well with the employer company.

Under existing law there is no charge to tax on the grant to an employee of a share option. But when the employee exercises the option, a tax charge arises on the difference between the market value of the share at that date, and the price he pays for it under the option. This made it difficult for an employee to be a long term shareholder, since he often could not finance both the cost of the share, and the tax bill, without selling the share.

Eight year breathing space

The Finance Act has gone a long way to resolving this problem. It has provided that the tax to which an employee becomes liable on the exercise of a share option will not be payable in respect of the year in which the option is exercised (as at present). Instead the tax bill will not arise until 1 November in the year which is eight years after the end of the tax year in which the tax liability arose.

If however the employee disposes of the share in the same tax year as in which he exercises the option, no deferral arises. If the employee disposes of the share in a later year in the eight year deferral period, the tax will become payable on 1 November following the end of the tax year in which the share is disposed of.

In other words, if an employee wants to hang on to a share indefinitely, he can get an eight year deferral of the tax liability. If he wants to dispose of the share, he will generally get a deferral until he disposes of the share.

The Finance Act 2000 reform eases the cash burden on the employee in exercising a share option. But it does not ease the tax burden on him if he wants to realise cash.

UK contrast

The Finance Act 2000 reform does not address the argument that SMEs in the high tech sector need a lower 20 per cent tax rate on shares and share options if they are going to compete world-wide, and especially against American competitors. That particular proposition has been put before a working party composed of employer, trade union, and civil service representatives with a view to coming up with some change for the next budget.

No doubt they will be looking at the UK system under which SMEs (ie trading companies whose gross assets do not exceed IEP15million) may award up to IEP1.5 million per annum of share options, spread over a group of not more than fifteen key employees at an effective tax cost of 10 per cent. That tax arises as CGT only when the employee sells the shares. The perceived difficulty with that approach in Ireland is that it discriminates in favour of key employees by not being all embracing. The answer may be that the problem faced by high tech SMEs does not extend to all employees but is confined to attracting key employees. The solution may need to be tailored to fit the problem.

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