What is an employee share scheme?
“employee share scheme” means any agreement or arrangement under which a company may issue shares in the company to —
(a) an employee of the company or an employee of an associated company; or
(b) the trustee of a trust and under the trust deed the trustee may transfer the shares to an employee of the company or an employee of an associated company.
Is the right or option chargeable to tax?
The value of a right or option to acquire shares under an employee share scheme granted to an employee shall not be chargeable to tax.
How are employee share schemes taxed?
Where an employee is issued with shares under an employee share scheme (including as a result of the exercise of an option) or right to acquire the shares, the amount chargeable to tax under the head “Salary” for that year shall include the fair market value of the shares determined at the date of issue, as reduced by any consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares.
What if there are restrictions on transfer of these shares?
Where shares issued to an employee under an employee share scheme and are subject to a restriction on the transfer of the shares —
(a) no amount shall be chargeable to tax to the employee under the head “Salary” until the earlier of —
(i) the time the employee has a free right to transfer the shares; or
(ii) the time the employee disposes of the shares; and
(b) the amount chargeable to tax to the employee shall be the fair market value of the shares at the time the employee has a free right to transfer the shares or disposes of the shares, as the case may be, as reduced by any consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares.
The cost of the shares to the employee shall be the sum of —
(a) the consideration, if any, given by the employee for the shares;
(b) the consideration, if any, given by the employee for the grant of any right or option to acquire the shares; and
(c) the amount chargeable to tax under the head “Salary”.
What happens if the shares are sold?
If an employee disposes of a right or option to acquire shares under an employee share scheme, the amount chargeable to tax to the employee under the head “Salary” for that year shall include the amount of any gain made on the disposal computed in accordance with the following formula, namely:—
A—B
where —
A is the consideration received for the disposal of the right or option; and
B is the employee’s cost in respect of the right or option.