Gifting shares to an employee and HMRC valuation

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    davidbaker
    Participant

    As an early stage startup (developing a product and not yet trading) that has raised some money (a friends and family investment round) we would now like to gift shares to two key employees who will join full time as the COO and CTO (approximately 5% each).

    Will there be any income tax liability and should the company agree a valuation with HMRC before gifting the shares to the employees?

    #3913

    Jonathan Lea
    Keymaster

    As an initial point, you can find information here about HMRC and the valuation of private company ‘unquoted’ shares in the UK: https://www.gov.uk/government/publications/hmrc-shares-and-assets-valuations-sav/hmrc-shares-and-assets-valuations-sav

    The shares issued to the employees will be deemed employment related securities and considered a ‘benefit in kind’, the value of which will be subject to income tax when received by the employee.

    Generally we would argue a relatively low/nil value on a pre-trading company. Unless the company has already created IP you could value. There are also large discounts from the market value for minority shareholdings.

    It would therefore be possible to do a (low) valuation for this transaction and send to HMRC’s SAV. However, most pre trading companies will not bother to do this and as there is no market for these shares and they are not considered to have any value that could be taxed as income.

    Note that the gift of shares (and value) to an employee needs to be reported by the company to HMRC using a P11d form:

    https://www.gov.uk/employer-reporting-expenses-benefits/reporting-and-paying

    If any value is attributed to the shares then this would go on a personal tax return for income tax purposes and the company will have the Class 1a NICs to pay at 13.8%.

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