Growing your business successfully depends on recruiting and retaining the right people. Share options and share based incentives can play an important part in this by ensuring that employees benefit when the company does well.
Share schemes generally fall into two categories: either shares are issued directly to employees or the company offers them the option to buy shares in the future. The advantage of the second approach is that when the company does well and the share price rises, staff can buy them at an earlier, lower price.
Enterprise Management Incentive Scheme
The most popular share option plan for SMEs by far is the Enterprise Management Incentive Scheme (EMI). It is approved by HMRC and enjoys a very favourable tax treatment. Under this plan, staff can buy shares in a specific time period and at a fixed price.
When employees exercise their option and buy, they are able to do so at the market price of the shares when the option was granted without tax consequences. It is quite common to only see EMI options exercised just before a third party sale of a company as there are limited benefits to owning a small minority stake in a private company otherwise.
A gain made on a disposal of EMI shares will be subject to capital gains tax (CGT). Often, provided the qualifying conditions are met, capital gains made on shares acquired by exercising EMI options are eligible for Entrepreneurs’ Relief. This provides for a 10% rate of CGT on total qualifying gains subject to a lifetime limit of £10m.
Employers also receive tax relief when EMI shares are exercised, which reduces their corporation tax liability.
EMI scheme requirements
EMI is very tax efficient, accordingly there are a number of conditions and requirements which need to be met.
Generally a qualifying company will need to be an SME carrying on a qualifying trade (trades like property development, share dealing or accountancy do not qualify). Employees receiving options are subject to total option value limits and must work full time for the company or group which issues them the options.
Alternative incentive arrangements
If share incentivisation is desirable then EMI is often the place to start. However, if EMI is not possible or there are reasons why it is not appropriate then there are other share based incentive arrangements which might fit the bill:
• Company share option plan (CSOP): This is an approved share option scheme that may be available when an EMI cannot be used. Under a CSOP, no income tax is charged on the exercise of an option. It is more expensive to run than an EMI and the maximum value of options that can be held per employee is much lower.
• Nil paid share scheme: Shares are issued at full market value, but nothing is paid for them. If the shares go up in value then on a company sale the employee is able to sell their shares and at the same time repay the subscription price. The main risk of a Nil paid share scheme is if the company drops in value the employee is left with a debt which is not covered by the value of their shares.
• Joint share ownership plan (JSOP): In this scheme the employee jointly acquires shares with a third party, usually an Employment Benefit Trust. It buys the beneficial interest in the shares up to a specific value. Because the employee acquires a restricted beneficial interest, they only receive the growth in value above a certain level.
• Employee Shareholder Scheme: Employers can offer shares worth between £2,000 and £50,000 to employees in exchange for the surrender of employment rights. The employee has to surrender rights including statutory redundancy pay and the right to claim unfair dismissal.
• Unapproved employee share options: Unapproved share options can be granted to any employee over any amount of shares. Unapproved option plans are easy to administer and set up, but the major downside is that any and all gains made are subject to PAYE and National Insurance Contributions.
Any kind of share based incentive plan requires specialist advice to design and create the most appropriate planning for a company.
Your St. James’s Place Partner will be able to advise you on which of our panel providers you would need to be referred to, given your particular circumstances for further advice in this area.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.Share options and incentives are not regulated by the Financial Conduct Authority.
Views expressed in this article are those of the contributor and for general advice purposes only. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained here in can be accepted by the LLP or any of its associated concerns. Kingston Smith LLP is registered to carry out audit work and regulated for a range of investment business activities by the Institute of Charted Accountants in England & Wales.