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I completed a project for a private limited company. They want to pay me in company shares worth £100K (as it is stated in our contract).

  • I am trying to figure out what tax implications would I face and what is the solution to pay as little tax as possible in short term.

  • Should I ask them to pay in share options? Can share options be priced at zero? How would that work?

  • Should I get shares on my name or under my company, what would be the difference.

Any other suggestions also welcome.

jcaron
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Mert
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  • You should correct your post to show that you are paid by contract. If paid by contract, then you should state in what form the payment can or must occur then your choices are clearer. The contract should state how they value the equity payment (shares, options are called equity) as 100K. – user2617804 Dec 05 '21 at 00:03
  • What restrictions are there around selling the shares immediately? You can't pay employees in shares, and the supermarket won't take them either. – Criggie Dec 05 '21 at 22:48
  • How much would the shares be worth if you were to buy them on the day you acquired them? Usually from the tax perspective it's the equivalent of being paid 100k cash, and immediately buying the shares yourself. – stanri Dec 06 '21 at 08:49
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    You are being conned. Nobody should ever be paid in equity. It is a common swindle in silicon valley and the various start-up scenes in the world. – Neil Meyer Dec 06 '21 at 16:12
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    @NeilMeyer Most of the time it is a con. The only way I see it not as a con is if you were to get voting shares that cannot be diluted without paying fair value at that time. VCs often demand this kind of equity, I would too if this was proposed to me. – maple_shaft Dec 06 '21 at 23:12
  • But the shares are given as an incentive for higher management to perform well not as a substitute for a salary. – Neil Meyer Dec 07 '21 at 09:04
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    It is not necessarily a con, but the valuation is very important. – pjc50 Dec 07 '21 at 11:14
  • Three entirely different but also important followup questions: Do you have the confidence that this company is going to be successful? Also, did you complete an entire 100k quid contract without receiving any kind of compensation so far? And as for the contract, does it say "100k in shares" or does it say "100k" and they're trying to pay the 100k in shares? – corsiKa Dec 07 '21 at 20:35
  • contract was 200k cash + 100k (shares), we did choose this way because company didn't have enough cashflow to pay it all in cash – Mert Dec 08 '21 at 01:52

6 Answers6

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If this is only being proposed now by the company after you have completed the work, then I'm afraid it sounds like an attempt by the company to avoid or defer having to pay you.

Firstly, what did your contract with the company say? If they owe you £100k for the work then they can't suddenly decide to pay you in shares if that was not in the contract.

Secondly, if the company is indeed a "private limited company" then who is deciding the value of the shares they want to give you? If it's not trading on a stock exchange then you have no idea of the market value of the shares. Even if it is trading on a stock exchange, and they paid you £100k in cash for the work, would you immediately turn around and use that £100k to buy shares in that company? If not then I would seriously consider whether you want to take this route.

Even if you are able to find a way to minimise your tax burden, you are still taking on the risk that you will be able to sell the shares for cash later.

Vicky
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    It was in our contract to be paid after complation of the project. I believe company had a valuation to decide how much does it worth and some other people also invested in the company assuming paying the valued price. my problem is I haven't think this through on tax perspective when I accepted. now I realise the tax burden, I am a little in panic so to speak :) – Mert Dec 04 '21 at 16:35
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    If it is a private company, keep in mind that those shares may not be very easy to sell/liquidate. – JohnFx Dec 04 '21 at 23:52
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    This might be a good answer to a different question as it does not adress the tax consequences. – ghellquist Dec 05 '21 at 06:26
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    The highest votest answer, that even doesn't attempt to answer the question? –  Dec 06 '21 at 12:40
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    @DanubianSailor I do get your point, but the question ends "any other suggestions also welcome" and you can interpret my answer as a "don't get paid in shares" suggestion. – Vicky Dec 06 '21 at 12:43
  • @ghellquist It sort of does... presumably if you're taxed on the value of the shares then if the value of the shares is negligibly small, the assessed taxes will be as well. – user3067860 Dec 06 '21 at 22:46
  • @user3067860 Nop. Not a single word a about tax consequences in the answer. In my country you would be taxen as income on the calculated value of shares at the day when you received them. Using income tax level that is different (higher) compared to capital gain tax level. And it is the tax authorities that does the value calculation. Paying in shares or options used to be a scheme to avert taxation and is well known by now by the authorities - hence not done very often due to the risks of fijnancial loss to the receiver. – ghellquist Dec 07 '21 at 06:10
  • @ghellquist It doesn't have to be spelled out, hopefully: The company isn't trying to help the OP with tax evasion, they're simply trying not to pay the OP properly. If they don't pay you, you don't owe taxes on what they didn't pay you. You don't pay taxes on a lottery ticket that didn't win or one where the drawing hasn't even happened yet. The odds of the OP ever being able to sell this stock for equal or more than the amount that they were originally supposed to be paid is about like the lottery. – user3067860 Dec 07 '21 at 13:51
  • @user3067860 The whole point is that you are considering a totally different question, something like "Is it a good idea to accept shares as payment instead of cash". It could actually be the very best deal of your lifetime as share in unlisted companies are usually not available for purchase and some of them has historically skyrocketed in value before beeing listed. Or, well, the value could go down to zero and you have paid tax on useless shares. Which begs the answer "What are the tax consequences", – ghellquist Dec 08 '21 at 22:37
  • @ghellquist The difference is if you're accepting shares that have some value right now...then you could have paid taxes and they fall to zero. But we are arguing that the OP is most likely being offered shares which currently have no value. – user3067860 Dec 09 '21 at 13:41
  • @user3067860 Try to convince the tax accountants that you have received shares without value for work performed. Will not happen. – ghellquist Dec 09 '21 at 21:03
  • @ghellquist I don't know why it wouldn't work, given that the stock in question is worthless. People make bad decisions all the time. Look at how many people buy into pyramid schemes...I mean, triangularly shaped companies...or e-mail scams. – user3067860 Dec 10 '21 at 13:47
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I'm putting aside all considerations of whether your particular case is a red flag and whether you should accept shares as payment, to give you an answer to your original question: what are the tax implications of being paid in company shares in the UK?

I am myself paid both in salary and Restricted Stock Units. Straightforwardly, when you receive some shares, you have to declare them to HMRC as income. It will be taxed and NICed at the same rate as if you received salary. You declare the market value of the shares you received to compute the income you declare. This can be harder to compute if the company stock is not listed.

If you keep the stocks after receiving them, when you sell them you will have to pay Capital Gain Tax on the gain, if any, with the market value of the day you received them as cost value.

The implication is that when you receive these shares, if you are not convinced they are the best financial investment, you should sell them for cash. Outside of very specific schemes, the UK does not provide any general tax relief to being paid in shares vs in cash, even if you keep the shares.

In particular, if you keep the shares and they tank, there is no (contrary to other countries) any way to recoup this loss by getting some money back from the original income tax. If they really tank, and your tax bracket is high, you could end up with a net negative gain. Example: you receive shares worth 100K GBP and your tax bracket is 45% + 2% NIC. You pay 47K to HMRC from your pocket as income tax on this. If the stock goes down 60%, your once 100K worth of shares is now worth 40K GBP, so less than the taxes you paid to acquire it.

As outlined by other answers, if you have any leeway to be paid in cash instead of shares, it may be better to negotiate for a cash payment since the share payment does not bring you any tax relief

Mysterry
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  • Can you deduct capital losses when you sell them? – lalala Dec 06 '21 at 10:57
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    The only answer that actually attempts to answer the question. –  Dec 06 '21 at 12:41
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    @lalala No, you will not be able to deduct any subsequent loss at sell time from the taxable event that happened when you received the share. – Mysterry Dec 06 '21 at 18:56
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    I'm not sure I get the figures in the example: "Example: you receive 100K GBP and your tax bracket is 45% + 2% NIC. You pay 47K to HMRC and keep 53K. If the stock goes down 15%, your shares are now worth 45K GBP". OP would pay 47K (cash, to get somewhere else) to HMRC but keep all shares (unless they manage to sell part of the shares at exactly the value they received them at, which is unlikely here). If the stock goes down 15%, the shares are worth 85K, so still a net gain (85-47=38K). If they manage to sell to pay the taxes, they are left with 45K worth of shares, and that's their net gain – jcaron Dec 07 '21 at 10:17
  • lets say got them into my own ltd, pay as corporate tax, if shares tank, cant I claim my tax back from future tax payments since my ltd made a loss? – Mert Dec 08 '21 at 02:16
  • @jcaron oh that's really a mistake from my side; thanks I'm changing the answer with correct math Mert: I don't have experience in having a company pay another with shares unfortunately – Mysterry Dec 08 '21 at 19:17
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The other answers seem to be focusing on "I wouldn't start from here" which is a good point for others but doesn't help you already agreed to this.

This will almost certainly be treated as payment in kind if you take it personally and you will take a cash tax liabilities you'll have to find from somewhere. Zero strike options probably won't help as it is the value of the transaction that is taxable. Also beware if the valuation of the shares is challenged by hmrc. If possible putting the shares in your company might be better as you may be able to mark them such that you are taxed when you eventually realise the cash from selling them. This is a very complex matter though so you need professional tax advice. It may be that they can find a way to pay the tax when the gain is finally realised on disposal but I'm unsure how you'd structure that.

Corvus
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    The point seems to be at least in part about how to value the shares of a company that's not publicly traded. For instance, I've worked for a couple of startups where part of my compensation was company stock. How could that be valued, pre-IPO? (In one case, the value turned out to be zero before I filed my income tax return :-() – jamesqf Dec 05 '21 at 18:30
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    Me too - plus the "value" as determined by the founder/CEO was quite a lot higher than what everyone else thought. – David Waterworth Dec 07 '21 at 03:31
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It depends. If you were contracting as self-employed, or as your own Ltd Co, or via an umbrella co, or you were paid personally as a private individual, the tax is different in each case. HMRC would treat the arrangement as set out in the written contract (IR35 possibly excepted), if there was one.

You should expect the true value of the shares you receive to be the number that HMRC would tax you (or your Ltd co, etc) on.

The true value of the shares does not necessarily equate to what you are told they are worth.

Jool
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  • I own a ltd with solo employee(myself), how do I know the true value of the shares? should I ask hmrc? – Mert Dec 05 '21 at 15:46
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    @Mert the true value is something you'll learn when selling, be prepared Tax Office may question your valuation if it will seem to low for them –  Dec 06 '21 at 12:40
  • If the ownership of the shares goes into the ltd company, then isn't the tax treatment completely different? – pjc50 Dec 07 '21 at 11:16
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I completed a project for a private ltd company. they want to pay me in company shares which they say are worth 100k.

This may be a danger signal: I wonder whether they are having cash flow problems? I'd be inclined to press for payment now, in folding money.

Simon Crase
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    Not even trying to answer the question about tax consequences. – ghellquist Dec 05 '21 at 06:26
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    OK, I'll try then: if the company has cash flow issues, and they pay you in shares that turn out to be worthless, there are unlikely to be tax issues. – Simon Crase Dec 05 '21 at 06:33
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    Are you sure? In some places (as in Sweden) the income tax would be calculated on the value of the shares on the day you receive them. Any later fall to worthless you would have to declare as capital loss. How do I know this? – ghellquist Dec 05 '21 at 06:37
  • @ghellquist: The rule is not unique to Sweden, nor is the problem of determining the value of stocks in a unlisted, failing-but-not-yet-bankrupt company. The tax authorities have the problem of assigning a value at a later time when it probably has become obvious that the company has indeed failed. – MSalters Dec 06 '21 at 14:45
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They want to pay me in company shares worth 100k (as it is stated in our contract).

What does this mean? Does the contract state a number of shares, or an amount? If an amount, who decides the value of the shares, and thus how many shares you get?

Note that there may be several classes of shares (with different rights), which may not all have the same value.

Note that for a private limited company (which is necessarily unlisted), the value of the shares can be quite difficult to find out, as there are many different methods which can lead to very different results.

Some investors may have paid a lot of money for shares because they think that the company will be making a lot of money and/or be sold for a very high amount in 5 or 10 years (which could be used as a current value of the shares), would you want to wait that long? Could you find someone else who is convinced of that valuation to sell the shares to?

Also note that the value can change dramatically depending on the company circumstances (trading not going as planned, or even bankruptcy) and any increase/decrease in the number of shares (you could be diluted to nothing), and that in the case of a private limited company, selling shares is not straightforward (it's not listed on an exchange, so you need to find a buyer and negotiate a price with them).

Of course, it's quite evident that you are most likely going to have a very small share of the company, so even if you have voting rights, they would amount to nothing.

You say that you own yourself a private limited company. Think about it, how much is a share of your company worth? How many shares to reach £100K? Can you easily sell shares of your company? Who to? At what price? How quickly? Would a supplier of yours accept shares of your company as payment?

Should I get shares on my name or under my company, what would be the difference.

Since you seem to be the sole owner and employee of your company this seems to make little difference, but if the contract was with the company, then it's the company who should be receiving the shares, not you, exactly like it's your company who should be receiving any payment, not you directly. Then the company is taxed on that income, and after that you can pay yourself (via dividends or wages), and pay taxes on that income you get from the company.

jcaron
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