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What Are Revenue-Approved Share Schemes?

Revenue-Approved Share Schemes provide an effective way of offering tax savings to employees in addition to encouraging employee participation and loyalty – here’s what you need to know.

Within the Irish tax system, many schemes exist which facilitate employers in allocating shares or granting options to buy shares, to employees tax efficiently. In fact, they are in operation in many Irish companies, as they are considered among the best practices for rewarding and retaining employees. So much so, in some industry sectors employees expect share participation as part of their total remuneration package.

Depending on the type of scheme, employees may have to hold the shares for a number of years before they receive the tax benefits. However, employees have always welcomed this as they allow the employee to participate financially, and in some instances tax efficiently, in the growth of their employer’s share price.

What kinds of schemes are there?

There are three types of Revenue-approved employee share schemes:

  • Approved Profit-Sharing Schemes (APSS).
  • Employee Share Ownership Trusts (ESOTs).
  • Save As You Earn (SAYE) schemes.

1. Approved Profit-Sharing Schemes (APSS)

If your employer operates an APSS, they may allocate Income Tax-free shares to you. However, you need to meet certain conditions.

Main things to know:

Your employer can allocate shares to you up to a maximum annual limit of €12,700––however, these shares must be held in a trust set up by your employer and must be held in the trust for a specified retention period (generally two years). If you leave the shares in the trust for three years, you will be exempt from Income Tax. Also, your boss may allow you to use your annual bonus to buy shares under an approved scheme.

Tax?

You are required to pay USC and PRSI on the value of the shares when they are appropriated to you. Your employer will make the necessary deductions through payroll and pay the tax directly to the Collector-General.

From the employers’ perspective, they can save on employer PRSI (currently 11.05%) where conditions of the schemes are satisfied.

Sale or transfer info:

If you instruct the trustee to sell or transfer your shares after two years, but before the end of the three years, you must pay Income Tax at the standard rate (20%) on the original market value of the shares.

You must pay this tax to the trustee before the transfer takes place, and they will remit this amount to Revenue on your behalf. This will be set against your final tax liability on the disposal or transfer of your shares.

You must pay Income Tax at your marginal rate on the lower of the:

  • original market value
  • and
  • disposal proceeds
  • or
  • shares’ market value at the date of transfer (in the case of a transfer).

After that, no additional USC and PRSI will need to be paid, as these will already have been paid at the time the shares were appropriated to you.

If your final liability is higher than the tax you paid to the trustee, then you must pay this additional amount to Revenue under the self-assessment system. You must include details of the transaction in your tax return.

What about the disposal of these shares after three years?

If you leave the shares in the trust for three years, you will be exempt from Income Tax. You may, however, be liable to Capital Gains Tax (CGT). Your employer will not deduct any tax or report the disposal for you, so it is important that you report this disposal to Revenue, even if no tax is due.

Finally, when you calculate the chargeable gain, the market value of the shares at the date of appropriation is generally used as your acquisition cost.

2. Employee Share Ownership Trusts (ESOTs)

An ESOT is a tax-favoured trust mechanism established by a company for placing shares into the hands of employees, that can be retained in the trust for up to 20 years for distribution to employees.

They are usually used in tandem with an APSS and have, up until now, mainly been set up by State and semi-State bodies. The shares acquired by the ESOT can be transferred through the APSS in a tax-free manner to eligible employees under the APSS rules.

Tax?

Payments received from ESOTs are taxable. You will not pay Income Tax on ordinary shares transferred through an APSS up to a value of:

  • €12,700
  • or
  • €38,100 (in very limited circumstances).

The shares must be held in trust for a specified period for the Income Tax relief to apply. You will pay USC and PRSI on the share awards.

From the employers’ perspective, they can save on employer PRSI (currently 11.05%) where conditions of the schemes are satisfied.

In some circumstances, your shares might have been transferred to an APSS. If they were, you will need to calculate your cost of acquisition in order to calculate your Capital Gains Tax. Deduct the market value of the shares, when first transferred from the ESOT to the APSS, from the disposal proceeds.

3. Save As You Earn (SAYE)

A SAYE scheme is a tax-efficient share option scheme that requires Revenue-approval to set up.  You can grant options over shares in your company to your employees, however, the shares must be ordinary shares.

Your employer may grant you share options under an approved savings-related share-option scheme. If so, you will be exempt from Income Tax on any gain you make when you exercise the options. However, it’s important to note that this tax exemption is applicable provided you do not exercise the share options within three years of receiving them.

Main features:

There are two elements to this scheme:

  • a certified contractual savings scheme
  • an approved savings-related share-option scheme.

The savings scheme is used to fund the purchase of shares allocated under the share option scheme.

Savings scheme:

If you decide to participate in the scheme, you must enter into a savings contract. Your employer may offer you a three, five or seven-year savings contract. Within this, you can save between €12 and €500 per month. Your employer will deduct the savings amount from your net salary and your savings are then placed on deposit with an approved bank or savings institution.

The amount you save must be enough to buy the shares at the option price your employer sets – a figure which will be set by your employer before saving. It may be set at a discount of up to 25% of the market value of the shares at the date of grant of the option.

Any interest or bonus paid on these savings will be exempt from Income Tax and Deposit Interest Retention Tax (DIRT).

Share-option scheme:

Once you complete the savings period, you can decide if you want to buy the shares. If you decide not to exercise your option, the bank or savings institution will return your savings to you. The total savings can be withdrawn tax-free.

Tax?

If you decide to buy the shares at the end of the savings period, you will not have to pay Income Tax on any gain you make. You will, however, pay USC and PRSI, and your employer will make the necessary deductions through payroll and pay the tax directly to the Collector-General.

If you dispose of your shares, you may be liable to CGT.

It is important that you report this disposal to Revenue, even if no tax is due, as your employer will not deduct any tax or report the disposal for you. When you calculate the chargeable gain, the option price is used as your acquisition cost.

Final details:

  • Shares awarded, or options granted, under an APSS and SAYE scheme, are exempt from Income Tax.
  • If the ESOT is used in conjunction with an APSS, those shares are also not subject to Income Tax.
  • You must pay Universal Social Charge (USC) and Pay Related Social Insurance (PRSI) on the value of the shares.
  • For anything else, contact Fitzgerald Power’s taxation team.

An additional share option scheme to consider is the Key Employee Engagement Programme (KEEP).

Under the scheme, you will be given an option to acquire shares at a future date, at a fixed price. You will not have to pay tax when you exercise the option, even if the shares have increased in value. There are a number of qualifying conditions in relation to share options, employees and the company. Details of qualifying criteria and how the scheme operates is available in Keep Employee Engagement Programme (KEEP).

Tax?

Taxation on grant of the KEEP options – you do not pay any tax on the grant of the KEEP options. Your employer will report details to Revenue on the KEEP options granted to you.

Any gains you make on the exercise of KEEP options will not be subject to Income Tax, USC and PRSI. Your employer will report details to Revenue on the KEEP options exercised by you.

If you dispose of your shares, you may be liable to Capital Gains Tax. You must report this disposal to Revenue, even if no tax is due. Your employer will not deduct any tax or report the disposal for you.

When you calculate the chargeable gain, the amount you paid at the acquisition date is used as your cost of acquisition. You may be able to claim Revised Entrepreneur Relief, if you satisfy the conditions.

Final note:

If you assign your KEEP options to a third party, they will no longer be eligible for tax relief. The assignment, and subsequent exercise of the options, must be dealt with as unapproved share option schemes.

We know taxes like the back of our hands, and with extensive experience and technical knowledge, we can help to ensure your tax obligations are met while identifying any opportunities to minimise exposure. If you’re looking for advice from some of the very best accountants in Ireland, we’re here to help. No two cases are the same, and we like to focus on getting to know our clients so that we can tailor our tax services to meet your specific needs. To find out more, contact our team at Fitzgerald Power today.