Share Schemes

Share schemes can be a powerful tool for recruiting, rewarding and retaining employees. If structured correctly, share schemes can provide employees with the opportunity to make substantial gains on shares, often in a highly tax efficient manner.

There is often a direct link between the actions of directors and senior management and the value of your company. Giving the management team a stake in your company can help motivate them to grow the business, aligning their interests with those of the shareholders.

A share scheme should meet the commercial objectives of your business. Whilst this must be the key priority, there are tax advantaged schemes which, if appropriate, can be tax efficient ways to motivate employees.

There are four tax efficient statutory arrangements:

• EMI (Enterprise Management Incentives)
• CSOP (Company Share Option Plan)
• SIP (Share Incentive Plan) and
• SAYE (Save As You Earn)

Share schemes that do not fall within any of the above are referred to as ‘unapproved’ or ‘non-tax advantaged’ schemes.

Broadly speaking, there are several ways to structure your share scheme:

• Shares
• Options (a right to buy shares in the future)
• ‘Phantom shares’ (a variation on a long-term cash-based bonus arrangement, with payments directly linked to share value)

Things to think about before setting up a share scheme

There are many things to consider before implementing a share scheme, including:

• What are you, the business owner, trying to achieve in the long term? It’s important to make a share scheme worth your while and worth your employees’ while
• Have you identified what type of share scheme will be the best fit for your business?
• What will be the impact of offering shares to your employees?
• Which employees/directors will participate and will more join in the future? What is your basis for this selection?
• How can the selected employees help the company grow in value or achieve the company’s targets?
• What does ‘good’ look like for the company/the individual? i.e. what is a motivating share scheme for employees and what outcomes might the employees look for?
• How will the employee realise value from the share scheme?

How we can help you implement the right share plan for you

Our team of share scheme specialists have decades of combined experience and can help guide you through the process of implementing a share scheme in your business. Some of the services we offer include:

• Helping you identify the type of share scheme which will be the best solution for your company
• Designing scheme terms focused on your commercial needs
• Carrying out a tax valuation of the shares to be used in the share scheme
• If CSOP, EMI or non-tax advantaged options are used, drafting the required documentation
• Reviewing documentation prepared by your lawyers from a tax perspective
• Providing detailed tax advice in connection with your share scheme
• Helping with employee communication to maximise the incentive impact of your share scheme
• Assisting with implementation of the share schemes, reporting and ongoing compliance matters
• Identifying and rectifying historical share schemes issues
• Assisting with the process of exercising share options

What is a share option?

Share options are a popular choice for incentivising employees. They allow an option holder to purchase shares at a point in the future for a price set today. This has the benefit of no up-front costs and no risk to the employee, as they do not have to buy the shares if the value has fallen.

A share option is not the same as owning shares – an option carries no rights to receive dividends, nor any right to vote. This can be an advantage for many private companies because business owners can retain all the shares until either an exit or a suitable point in time.

Provided conditions are met, share options can be granted under one of two ‘tax advantaged’ schemes. All other share options will be ‘non-tax advantaged’ or ‘unapproved.’

Helpfully, there are no tax or national insurance contributions (NIC) payable upon grant of a share option to an employee or director.

What is an unapproved option?

Unapproved options are very flexible and open to all companies. However, when an employee or director exercises their right to buy the shares under option, they will be liable to income tax on any increase in the value of the shares above the exercise price. Both employer’s and employee’s NIC may also be due.

What are EMI (enterprise management incentives) options?

Enterprise management incentives (EMI) options are a popular share scheme for small and medium sized companies, delivering generous tax advantages to the employees and the company. Gains made on the sale of shares acquired under EMI are generally subject to capital gains tax. In addition, EMI provides enhanced access to additional tax reliefs meaning gains on the sale of EMI shares are often subject to a tax rate of just 10%.

Although not as flexible as an unapproved option, EMI is still highly flexible. However, to qualify for EMI the company, the recipient, and the option agreement must satisfy several qualifying conditions (e.g. the company must be carrying on a ‘qualifying trade’ and have fewer than 250 employees).

You can find out more in our EMI brochure.

CSOP (company share option plans)

As with EMI, gains made on the sale of shares acquired under CSOP are generally exempt from income tax (although the income tax relief is unavailable in certain circumstances).

In common with all tax advantaged schemes, there are several requirements that must be met. For example, the purchase price of CSOP options must not be less than the market value of the shares on the date of award, and each employee can only be granted CSOP options over shares worth up to £60,000. This limit has recently increased from £30,000, giving far greater flexibility than previously.

There are no restrictions on the size of company that can implement a CSOP and there are no excluded activities. If your company does not qualify for an EMI arrangement, exploring CSOP may be worthwhile as it can end up just as tax efficient as an EMI scheme.

You can find out more in our CSOP brochure.

What is a direct share acquisition?

Employers often provide directors and employees the opportunity to buy shares in the company outright. It is common for shares to be acquired at a discount to market value, but there are tax implications of this approach.

Where an employee or director buys shares in their employer company there are several tax anti-avoidance provisions to consider. Therefore, even with a seemingly simple arrangement, seeking professional advice is recommended.

Arrangements to help employees buy shares have the advantage that the employee becomes a shareholder from the outset, with the benefit of feeling like a co-owner of the business.

Where an employee buys or is given shares in a company, it is common to include provisions requiring the employee to forfeit the shares in certain circumstances, e.g. on ceasing employment with the company or group.

Can you buy shares now and pay later?

If an employee or director buys or is given shares in a company they work for but pays less than market value for them, then there will be an employment income tax charge. However, sometimes paying market value for shares is unaffordable.

Rather than suffering the above employment income tax charges, there are ways to manage the upfront cost, for example, by the employer making a loan, or offering the shares on ‘buy now, pay later’ terms.

Typically, the loan or the unpaid subscription monies must be settled immediately before the shares are sold.

As with all share acquisitions, there are company law and tax issues that must be carefully managed. ‘Buy now, pay later’ shares also represent a greater risk for the employee – if the company fails, then the employee remains liable for the loan or the outstanding subscription price, even if the shares have become worthless.

What are growth shares?

Growth shares (also commonly referred to as ‘hurdle shares’) typically give the holder a stake in the future capital growth of a company but with little or no interest in any of the existing value. Growth shares are regularly used in high growth companies.

Typically, a holder of a growth share will have a right to participate in the future sale proceeds of the business, but only to the extent that the company value has grown beyond a threshold. Growth shares are therefore a popular choice for employers looking to incentivise employees and directors to grow the company without giving away the inherent value built up by the current shareholders.

What is a phantom share scheme?

A phantom share scheme is a special form of bonus scheme that tracks the value of shares in a company and will typically pay out to a participant once the shares reach a specified value. This can be a useful method of incentivising employees without the requirement of awarding shares. Avoiding the use of shares is potentially desirable for several reasons (e.g. reducing admin requirements associated with issuing shares or preventing the dilution of existing shareholders).

From a tax perspective, a phantom share scheme is treated in the same way as any other bonus scheme. For most employees, a phantom share scheme will not be tax efficient, and any bonus received will be subject to income tax and national insurance contributions (NIC).