Tax implications of sweat equity

Sweat equity is normally defined as ‘unpaid labour’ that an employee entrepreneur or investor puts into a business in order to build it up while cash resources are limited in the hope that they will be rewarded by a long-term increase in the value of equity in the business.

However the warm glow of success when that unpaid labour contributes to the building of a valuable business can also lead to a level of anxious perspiration if the tax issues that arise from sweat equity have not been properly considered and addressed.

When an employee or an officer of a company is rewarded or incentivised by the allocation of shares or options in the company there are detailed – some would argue ‘complex’ – tax rules dealing with employment related securities (ERS) that regulate how those arrangements need to be taxed.

Much has been...