CGT or Income Tax

Dublinandy3

Hi All,

I received a gift of shares from my employer which I subsequently sold when I was able to. The return was 1080 Euro. I was under the impression that as I'd had nothing else fall under CGT, this would as it was a sale of shares.

However, my employer feels differently and said it falls under income tax and have subsequently paid on my behalf. Usually, I'd accept that and believe our companies payroll dept would know more than me but due to some other unrelated things that have happened in the past, they do make mistakes.

Their argument is that because the shares were never bought by me, and were a gift from the employer, so returns from them is income tax and not CGT.

Who is right?

TIA

relax carry on

It could be both. There are a multitude of share schemes in operation where income tax can apply to the discount received in acquiring the shares (in your case it's 100% as you got them for free) and CGT may apply to any increase in the value of the shares from when you aquured them to when you sold them.

Think about it this way. You received a non monetary benefit form your employer. Income tax should apply to it just like any other non monetary benefit you receive like Medical Insurance paid for you or private use of a company car in your own right.

dotsman

My understanding is that it depends on whether it is an "Approved" or "Unapproved" scheme.

Revenue, as usual don't really explain it very well on their website:

Income Tax (IT) is chargeable on shares or share options acquired by employees free of charge or at a discount price. Share based remuneration is also liable to Universal Social Charge (USC) and employee Pay Related Social Insurance (PRSI).

Employees may also acquire shares or share options under any one of the tax efficient employee share schemes. Subject to certain conditions being satisfied, IT will not be chargeable on shares or share options acquired by employees under these schemes.

Basically, my take on the above is that Income tax does apply (but only at the time of issuance and on whatever discount etc you received), unless it is an Approved Scheme.

With regards Approved Schemes:

Shares awarded, or options granted, under an APSS and SAYE scheme, are exempt from Income Tax (IT). If the ESOT is used in conjunction with an APSS, those shares are also not subject to IT.

None of the above seems to discuss the tax liability on the sale of the shares. on that basis, I would say the tax applicable on the sale is just CGT, the same as any other share sale.

However, a quick google will give you KPMG's take on the matter. Here, at least it is better written and a little bit more clear. However, it is KPMG (who are BS artists, so it doesn't mean that they are correct!):

On Unapproved Schemes:

What are the tax consequences for employees?

Income tax, the Universal Social Charge (“USC”) and employee PRSI are charged on the difference between the option price and the market price when the option is exercised (see over for options capable of lasting more than seven years).

On Approved Schemes:

What are the tax consequences for employees?

Each participating employee can have a maximum allocation of shares of €12,700 per tax year. The trustees must retain the shares for at least two years.

There is no income tax charged on appropriation of shares. The income tax free appropriation amount is charged to the USC and employee PRSI. This USC and employee PRSI should be withheld by the employer via the PAYE system and remitted to Revenue for the month of appropriation.

After this two year period, the employee may allow the trustees to continue holding the shares for a further year. As long as the shares have been held in trust for three years, there is no income tax, USC or PRSI liability on the transfer of ownership to the employee at the end of the three year period.

If the shares are subsequently sold or gifted there will be a CGT exposure.

ShelbyInc

For CGT to be applied there must be a chargeable disposal of a chargeable asset by a chargeable person. All boxes ticked, the disposal of company shares by you is a capital transaction. The gain is roughly €1,080 and your CGT annual exemption of €1,270 eliminates this.

You were “gifted” the shares by your employer but they were gifted to you as a direct result of your employment and so, at first glance, income tax should apply as opposed to gift tax(CAT). Unless your employer operates a revenue approved share option/giving scheme, income tax should have been applied at the date of grant and would be based on MV of shares at date of grant(or end of any vesting period where appropriate)

On disposal of shares any income tax paid by you, with respect to the shares, would be treated as enhancement expenditure to increase the base cost of the shares and reduce or potentially offset any gain and CGT liability.

Dublinandy3

Thanks all, appreciated