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.
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.
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
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.
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.
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.
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.
