Executive Shares and Options: Beware the “Liquidity Trap”
Deferred tax benefit may bring tax surprises
Many executives receive shares and options from their employer as part of the remuneration package. Mostly this form of bonus is received without the need for any immediate cash or tax outlay. And because the shares and options are restricted from sale until some future date they often get filed away in the bottom drawer for some future review.
While this may be a fairly natural response to something that has no immediate impact, failure to manage these “gifts” can result in some nasty surprises.
These bonuses are not “free”. They come encumbered with future taxing points and unless you keep good records and have a clear strategy for managing them you may end up in an unexpected “liquidity trap”. The two case studies discussed below provide illustrations.
Employee Share Schemes – Are the proposed changes all bad news?
For many, receiving shares or options from your employer is a welcome benefit. There are usually no immediate tax or cash flow implications and you simply get access to a new investment that, hopefully, will grow in value.
The May 2009 budget proposed changes to the treatment of these benefits which are likely to affect both the issuance and immediate implications of employee share schemes in the future.
Currently, as a recipient of shares or options under an employee share scheme , you get the choice on when to pay tax on the benefit you receive. If you do nothing, you will be deemed to defer the tax until a later date (the “cessation time”). Alternatively, you can elect to pay tax on the discounted benefit upfront by making an election in your tax return.
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