What employees can do to protect maturing share schemes from tax

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)?

Jonathan Watts-Lay, a director of WEALTH at work, said: “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. First, the CGT liability can often be split over two consecutive tax years, meaning that £22,200 rather than £11,100 of gains could be sheltered from CGT. Don’t forget transfers to a spouse or civil partner is exempt from CGT and by doing so, you can make use their partners CGT allowances. It should be noted that the transfer to a spouse or civil partner should be considered as an outright gift.

“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 doing transfers 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 £30,480 of your share scheme capital to be invested into a tax efficient ISA wrapper.

“Those 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 remember that for the brief time they hold the shares, they are exposed to market risk.

“If an employer offers this type of share scheme it is usually a good idea to save into it. However, if the bulk of someone’s savings are in shares of the same company for which they work, they should consider diversifying to a broader spread of investments as each scheme matures. 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. If the company were to struggle, they could lose their job and savings, as we saw during the financial crisis.

“We work with many individuals to help them to consider how to hold their investments in a manner that is not only tax efficient but can help avoid taking more risk than they may wish to.”