Tax Treatment of shares obtained by directors and employees –
An employee or director may be awarded shares by the employer or be granted an option or right to acquire shares at a discounted price. The employer may impose a restriction on the disposal of the shares until a specified period has elapsed.
Shares are restricted if the following conditions are satisfied –
- A written contract under which a restriction is in place. These are shares owned by directors or employees that have restrictions to transfer, charge and dispose of their shares for a specified period of not less than one year
Income tax charge arises when the shares are provided for less than the market value.
The amount chargeable to income tax is the difference between the market value of the shares and the price paid by the director or employee.
There is a reduction of income tax chargeable which is between 10% and 60%. This applies when the shares are held for the number of years the restriction is in place, i.e the number of years restriction is 1 the rate of reduction is 10%, 2 years is 20% etc.
To qualify for this reduction the director/employee must
- Have restricted shares
- Have shares in the company which the employee/director is employed
- The shares must be held in a trust established by the employer
Shares can’t be disposed of during the period of restriction except in certain circumstances- death of an employee/director or where there is a change in control or reorganisation in the company in which shares are held. Where shares are disposed of before the period of restriction the income tax charge must be adjusted to the actual period the restriction was in place.
An employee is awarded 2,000 shares in his employing company. The market value of the shares at that date is €10 per share. These are restricted shares which prohibit the employee from disposing the shares for 4 years.
Market value of shares €20,000
Amount paid by employee nil
Gain to employee €20,000
Reduction in amount chargeable to income tax (40%)* €8,000
Amount chargeable to income tax 2014 €12,000
*As the shares are held for 4 years 40% reduction