FAQs - Executive financial consulting

How are my unapproved share options taxed?

There are various circumstances in which a tax charge can arise where a director or employee is granted options to acquire shares by reason of employment where the scheme is unapproved by HM Revenue & Customs (HMRC).

a.    Grant of option

No income tax liability arises on the grant of an unapproved option.

b.    Exercise of the option

A tax charge arises on the difference between the market value of the shares at exercise and the strike/option price.  This gain is taxed as income in the hands of the employee.  Tax will be charged at the marginal rate (usually 40%).  National Insurance Class 1 will also be charged on the gain (usually at 1%).

PAYE will be operated on the gain in most circumstances and so the company will often immediately sell 41% of the holding in order to collect the tax.

c.    Sale of shares received

The difference between the proceeds received on sale of the shares and the total of the amount paid for the option and the gain assessed to income tax (effectively the market value of the shares at exercise) will be assessed on the employee as a capital gain.

It is necessary to report the exercise of the unapproved share options on the Share Scheme supplementary pages of the tax return.  Depending on circumstances, it may also be necessary to report the capital gain on the Capital Gains Tax supplementary pages.

What are the more tax efficient ways of making charitable gifts?

Gifts to charity fall into two main categories

a.    Gift of cash to a charity under the Gift Aid scheme

The gift must be made to a registered UK charity and a declaration must be made at the time of the gift specifying it is made under the Gift Aid scheme.  The charity can reclaim the basic rate tax on that gift i.e. 22% of the value of the gift Until 5 April 2011 or 20% after this date.

A higher rate taxpayer can then claim higher rate tax relief of 20% of the gift through the tax return or the PAYE Code.

A payment to a Charities Aid Foundation account receives relief at the date of the deposit rather than the subsequent gift to the charity.

b.    Gift of assets to charity

An individual is entitled to tax relief on the gift of quoted securities or land to a registered UK charity.  The relief is obtained either via the tax return or PAYE code and is equal to 40% of the market value of the asset at the date of gift.

Any capital gain arising on disposal of the asset i.e. the difference between the market value at gift and initial cost, is exempt from tax.

Can trusts still be used for tax planning?

Finance Act 2006 radically altered the inheritance treatment of trusts.  Any gift to a trust is now subject to an immediate charge to inheritance tax.  Also, the trust fund is subject to a 10 yearly inheritance tax charge of 6%.

However, even after the above changes, a trust remains an essential tool for tax planning purposes allowing assets to be passed to future generations while allowing a level of control to be retained.

Through careful management of the initial assets settled, it is possible to avoid the initial tax charge.  Various methods are also available to allow further gifts to be made to the trust with no tax charge.  Due to the certainty of the 10 year charges, planning can then be undertaken to ensure sufficient funds are available to meet this liability.  

If you require further guidance on any of the above, please contact Smith & Williamson.  We are also able to advise on:

• the tax implications of HMRC approved schemes and the implementation of share shave schemes
• the setting up and administering of Charitable Trusts
• the administration of trusts, act as corporate trustee and deal with all of the necessary compliance tasks