A Slice of the Action: Company Share Schemes (Part 1)
In our two part series, we’ll be looking at the tax advantages of company share option schemes for directors looking to reward, retain, and incentivise their staff.
In brief, a share option gives a recipient the right (but not the obligation) to acquire shares in a company in the future. This can give employees the chance to share in the growth of the company, providing strong incentives, whilst being very cost-efficient from the company’s perspective as well.
In this part, we’ll focus on two of the more common schemes used by SMEs: Company Share Option Plans (“CSOPs”) and Enterprise Management Incentive schemes (“EMIs”). The second part will examine Share Incentive Plans (“SIPs”) and Save As You Earn schemes (“SAYEs”).
Before we consider these tax advantaged share schemes, it is worth noting the tax and NIC consequences of giving employees non-tax advantaged shares.
Non-Tax Advantaged Share Option Scheme
Providing employees with shares can come with significant tax and NIC costs.
Whilst there is no charge to income tax when a non-tax advantaged option is granted to an employee, a charge to income tax will arise when the employee exercises that option and acquires their shares.
Income tax is charged on the market value of the shares received by the employee, less any consideration they pay for the shares.
If the shares are readily convertible assets, then both employee’s and employer’s Class 1 NICs will be payable and PAYE will need to operated.
This can create cash flow problems for employees who may find that they have significantly more tax/NICs withheld from their salary in the pay period they receive their shares.
Tax Advantaged Share Option Schemes for Select Employees
A number of tax advantaged share schemes have been introduced to reduce the tax and NIC costs for companies wanting to provide shares to their employees.
CSOPs and EMIs are two types of tax advantaged schemes and are often used when companies want to reward select staff. Further details are provided below:
Company Share Option Schemes (“CSOPs”)
Provided that the relevant qualifying conditions are met, there will normally be no tax or NIC implications if employees exercise their CSOP options within 3-10 years after they’re granted.
Therefore, the only tax payable should be capital gains tax (“CGT”) when the employee comes to sell their shares.
Up to £30,000 worth of options can be held by an employee at the date the option is granted.
Enterprise Management Incentive Schemes (“EMIs”)
EMIs are aimed at smaller companies and offer more generous tax benefits than CSOPs, therefore the qualifying conditions that must be met in order for relief to apply are more restrictive.
Provided that the shares are granted at market value, the only tax payable by employees in respect of their shares is CGT on a subsequent sale.
One of the main advantages of EMI shares is that they carry privileged treatment for Entrepreneurs’ Relief with CGT. This can further reduce the overall tax payable by allowing gains on the disposal of EMI shares to be taxed at the flat rate of 10%.
Unlike with CSOPs, EMI options can be granted at a discount (however this will undermine some of the income tax/NIC advantages) and the maximum value of shares over which an employee can hold options is £250,000 (as opposed to £30,000 for CSOP). This maximum includes any CSOP shares an employee may already have.
EMI options can also be exercised up to 10 years from the date of grant so there is no minimum waiting period. In practice, option agreements can specify that the options will only become exercisable on some given event in the future when the shares have (hopefully) risen in value; for example, immediately before a sale of the company, on the employee or company meeting specific targets, etc.
There are a number of conditions which must be met by both the potential option holder and the company in order to benefit from EMIs and CSOPs. The precise conditions will also vary depending on the type of company involved.
If you’re interested in tax advantaged share options schemes and would like to know more, please contact a member of our team.
State Aid Approval for EMI Options Renewed (17 May 2018)
State Aid Approval for EMI Options Lapses (10 April 2018)
Employee Shareholder Status – Practical Benefits (15 May 2015)
Employee-Ownership Trusts – Who Can Benefit (15 May 2015)