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How to help employees protect their maturing share schemes from tax

Article by: Jonathan Watts-Lay | Published: 11 August 2017

Employees from many leading companies are benefiting from maturing Save As You Earn (SAYE) share schemes this year, but what can they do to make sure that these potentially life changing amounts aren’t eroded by Capital Gains Tax (CGT)? From Jonathan Watts-Lay, Director, WEALTH at work.

There are a few key things that share scheme participants should consider to protect their windfall from Capital Gains Tax (CGT) and manage it in the most tax-efficient way. Firstly, the CGT liability can often be split over two consecutive tax years, meaning that £22,600 rather than £11,300 of gains could be sheltered from CGT. Don’t forget transfers to a spouse or civil partner are exempt from CGT and by doing so, you can make use of their partner’s CGT allowance.  It should be noted that the transfer to a spouse or civil partner should be considered as an outright gift. Also, whilst deferring the exercise of the option, the value of the shares can of course fall as well as rise and is therefore at market risk during this period.

Employees can also carry out an ‘in specie’ transfer into an ISA within 90 days of exercising the option and any gain on the shares transferred is exempt from CGT.  Many high street ISA providers can’t facilitate an in specie transfer so employees would need to use a workplace ISA, or a specialist provider. Due to the timing of many SAYE scheme maturities, it may be possible to reduce a potential CGT liability further by transferring shares to an ISA over two consecutive tax years, so long as the 90 day period straddles the tax year end.  This would potentially allow up to £40,000 of an individual’s share scheme capital to be invested into a tax efficient ISA wrapper.

Employees who want to cash in their shares can mitigate CGT by transferring shares into an ISA before selling them and withdrawing the money. However, it is important to for employees to note that for the brief time they hold the shares, they are exposed to market risk and there will also be ISA provider charges to consider.

Employees also may want to consider diversifying their shares to a broader spread of investments as each scheme matures as  having all your eggs in one basket is considered a high risk approach. It is often advisable to spread investments as widely as possible and thereby reduce the risk of being exposed to the movements in price of just one company.