If you are keen to incentivise, retain, and reward key staff, we can design and implement an attractive and effective share option scheme for the benefit of your employees.
The four tax-advantaged share option schemes approved by HMRC are:
- Enterprise Management Incentives (EMIs)
- Company Share Option Plans (CSOPs)
- Share Incentive Plans (SIPs)
- Savings Related Share Option Schemes (also known as Save As You Earn, or SAYE, schemes).
What are the advantages of employee share schemes?
- Attract, retain, incentivise, and reward key staff.
- Increase productivity and performance (tailored targets can be set by you).
- Relieve cashflow pressure – bonuses and salary increases can deplete cash reserves; however, a properly structured share option scheme can provide a valuable incentive without diminishing cash in the company.
- Allow shareholders/directors to pass on their shares to employees and obtain full market value for these. This can be funded by the company, allowing tax efficient extraction of funds.
What are the tax benefits of HMRC approved employee share schemes?
- If employees receive shares by reason of their employment/through a non-tax advantaged scheme, there will usually be income tax (and possibly national insurance) implications. If they receive shares through a HMRC approved share scheme, they may be able to obtain shares in the company that they are employed by and pay no/a reduced amount of income tax and national insurance.
- Shareholders/directors may be able to extract cash to the market value of their shares from the company as capital, thereby paying capital gains tax “CGT” on this. Business Asset Disposal Relief may also be available to reduce the applicable CGT rate to 10%.
- Corporation tax deductions may be available for the company.
How can we help?
If you are considering the implementation of an employee share scheme it is important that you seek professional advice to ensure the relevant scheme rules are met and to make sure that the scheme is structured to meet your objectives and maximise the tax benefits.
We can advise you on the share scheme that would be most beneficial in your circumstances and ensure that you achieve the best possible results for your business.
The client had two employees who were key to the future growth of the company. The existing shareholder directors were concerned that the employees may look for opportunities elsewhere and were keen to encourage them to stay with the company by putting an incentive package in place.
We quickly established that an EMI Share Option Scheme would incentivise the employees by providing a mechanism through which they can become shareholders in the company.
By utilising an Employee Benefit Trust, the existing shareholders could also extract funds from the company in a tax efficient manner rather than their shareholdings simply being diluted by the issue of new shares to the employees.
Both the company and the employees were happy with our proposed solution so we implemented the EMI share option scheme, taking care of all the EMI share option scheme and Employee Benefit Trust documentation and agreeing the value of the shares with HMRC.
The two employees have been given targets, which if met, will allow them to exercise the EMI share options over 15% of the shares each, in three tranches over the next 10 years.
When the shares are exercised; the employees will have no tax to pay on the benefit received, the shareholders will receive a payment for the shares (potentially paying tax of 10% due to the likely availability of entrepreneurs relief), and the company will receive a corporation tax deduction for the funds contributed to the Employee Benefit Trust to facilitate the purchase of shares.
Our client found that the performance of the two employees increased noticeably as soon as discussions over the terms were entered into – now that the EMI scheme has been implemented the results should be even better.
PD Tax were appointed to assist a group of shareholders in selling their business to a third party. It was important to them that they sold their shares in the company to optimise their tax positions.
However, after carrying out due diligence, the buyers decided that they did not want to buy the trading company from the sellers because they thought that the company had undertaken an aggressive employee benefit trust (EBT) tax arrangement in the recent past (PD Tax did not advise on the EBT arrangement).
The buyers suggested that they buy the trade and assets from the trading company, as they were still keen to make the acquisition. However, this was not in the interests of the sellers because this meant that they would suffer a much higher rate of tax than if they sold the shares.
Therefore the EBT became a sticking point in the deal.
PD Tax worked with the sellers to develop a structure which meant that they could retain a low tax rate, whilst retaining the company which had carried out the planning, thus allowing the purchaser to acquire a new “clean” company.
We were able to develop a practical solution to the problem and the buyers were happy to utilise our proposal to overcome the EBT arrangement, as far as the sale was concerned.
With the support of PD Tax, the sellers were able to complete the sale without further discussion regarding the level of consideration for the business.