Larger private companies in the UK sometimes reward their employees by giving them equity in the company, i.e. shares. It can often be used as an employee perk or part of a remuneration package, particularly when an employee has completed so many years in the business or is promoted to a senior position. Employers opt to offer share plans to either all employees (usually based on period of employment) and/or to C-suite directors. In many cases, when a private company goes down this route, it preempts a trade sale or public offering. Alternatively, a private company is able to create an internal share market through an employee benefit trust, using a share option plan. But if employees want to opt out of their share option scheme, how do they liquidate equity in a private firm?

The types of company equity plans

There are four principal share option plans that are suitable for private companies, all of which have strict eligibility criteria:

  • SAYE – a SAYE (Save-as-you-Earn) scheme grants employees with share options based on favourable tax benefits. The employee agrees to save a specific amount over a fixed period of time, usually three or five years. At the end of the time period, the savings can be a tax free bonus. Employees can take advantage of the option price for shares, which is usually significantly lower than market value.
  • EMI – EMI (Enterprise Management Incentives) options are a way for small private companies to take advantage of favourable tax benefits when they grant share options to a selected group of employees, i.e. C-suite only.
  • CSOP – a CSOP (company share option plan) grants employees the option to buy a set number of shares at a fixed price, but they must be bought within a specific time period. The price is usually equal to current market value and generally, employees are not allowed to sell, transfer or gift the shares for three years.
  • Non-tax favoured share option plan – unlike the other three options above which come with tax benefits, a non-tax beneficial share option plan can be established by an employer to reward their employees.

How to liquidate equity in a private firm?

In most cases, employees are not allowed to liquidate their share equity in a private firm for a certain period of time, usually three years or based on performance. There are also certain tax implications, which vary according to the share option plan set up by the employer.

For example; when liquidating equity that has met any time or performance-based requirements, NICs (National Insurance contributions) and tax are not payable. Should an employee liquidate their equity prior to the end of the third year, or before a performance milestone is reached, they are liable to pay income tax and Capital Gains Tax (CGT). However, if that employee leaves the share option scheme through redundancy, retirement or another reason that is not of their own doing, they may be eligible for tax relief.

When an employee is a member of a non-tax favoured share option plan and decides to liquidate their equity in a private firm, the difference between the market value of the shares on the date they are exercised and the exercise price is subject to income tax. However, if the shares meet the required criteria, the employer pays the income tax as well as the NICs for the employer and employee. If the company is not liable for tax, the employee must pay the income tax via HMRC’s self-assessment process, but no NICs are payable.

If the shares, when exercised (withdrawn from the scheme), are sold, the employee will be liable to pay CGT. Depending on the type of share option scheme that the company uses, the employee will be subject to 10% or 20% CGT on the difference between the price paid when the shares were exercised and the shares sale price when sold.

The 10% rate applies if the employee’s total taxable gains, including income, are below the current upper limit of the basic rate of income tax, which was £37,500 in 2020/21. If total gain and income is above this limit, the 20% rate applies. In addition, it is possible to offset any losses using their applicable annual exempt amount against any gains (£12,300 in 2020/21).

Selling, gifting or transferring equity

Employees that have received equity in a private company, usually through a particular share option scheme, are entitled to sell, gift or transfer their equity to someone else. There can be a variety of reasons why this takes place, including:

  • Transferring to a spouse or children as part of a tax strategy or passing the ownership of a business to another.
  • Transferring to a pension scheme or an ISA.
  • Transferring to a business partner as part of an agreement.
  • Transferring to another person when divorcing, separating or dissolving a civil partnership.
  • Transferring on the death of a shareholder.
  • Transferring as part of a corporate restructure.
  • Transferring to realise shares and receive the cash return.

Assuming the equity is transferable, the procedure is:

  1. The seller and the buyer/receiver complete and sign the company’s approved stock transfer form. If the transfer is due to the death of a shareholder, a representative of that person (usually a living spouse/relative, their solicitor or executors of the deceased’s will) signs the form.
  2. The form is passed to HMRC who calculate the stamp duty to be paid and stamps the form upon receipt of payment (within 30 days of the share transaction). Stamp duty on the shares is payable by the purchaser if the total value of the shares is above £1,000. The current rate is 0.5% on the value above £1,000 and it is rounded up to the nearest £5.
  3. Upon receipt of the form, the company validates the transfer documents and share certificates returned. If the transfer is due to the death of a shareholder and documents are signed by another person, they will need to see the Grant of Probate or Power of Attorney. They then decide whether to approve or oppose the transfer, documenting their decision.
  4. Upon approval of the transfer, the company’s representative updates their share members register, cancels the existing share certificates and issues new share certificates to the new owner.
  5. Companies House is notified of the transfer of shares by way of a confirmation statement issued by the company.

The same process applies whether the equity is being sold, gifted or bequeathed to another.

If you are looking to liquidate equity in a private firm, whatever the reason, the first step is to seek professional advice.  Our highly experienced professionals at Leading are on hand to help with advice on administering insolvent estates as well as insolvency matters. Contact us today and discover how we can help you.