So we know about Business Asset Disposal Relief don't we? 10 per cent Capital Gains Tax rate for shares in a trading company when they are sold. We have to own the right amount (5 per cent) of shares (voting) for the right period (24 months before sale). That's it, isn't it?
But what if the shares you think you own aren't really shares at all?
I've recently had an experience where I had to tell a potential client that, no, he wasn't going to get the 10 per cent tax rate on the shares his employer had given him. Worse still, he wasn't even going to be charged 20 per cent CGT. He was looking at marginal income tax rates on his shares. That's because his shares weren't shares in the company at all.
His employer had, at great professional expense I think, installed what he called a "virtual" share scheme. The virtual shares had all the hallmarks of real shares (subscription price, "dividends", rights issues etc), but was in essence simply a mechanism to enable a deferred bonus based on the real share price to be calculated on sale. My potential client therefore would receive a deferred bonus of over £2million with all of the income tax and NICs that would result. He'll end up with something less than £1million tax-paid. Not to be sneezed at, but disappointing when expectations were different. Exit stage left, one rather demotivated senior executive.
What had the employer done wrong? He wanted to build up the management team and for them to have some monetary interest in company growth and ultimate sale. So far, so worthy.
The nature of the business meant that EMI share options (my normal preference) weren't available. His accountants at the time suggested a phantom share scheme (which this is) and the owner dressed it up a bit for the 21st century by calling it a virtual share scheme. What he didn't do though, was talk to his employees and set their expectations. Into that vacuum of knowledge stepped misunderstandings about tax fed, most probably, by the tax adviser's avowed enemy, "the bloke down the pub".
That's why with all of the work I do helping owners to build up management teams, tax-efficiently, be that EMI schemes, growth shares or "phantom" schemes, I always include some time to explain to the recipients what their employers are offering them, the pro's and con's and the potential tax treatment on sale. Only by setting those expectations can the employees truly understand the value of the share award, and it is that value which will ensure that the owner's aim in creating the scheme, (retention/reward/motivation etc) is achieved.
