There are many uncertainties in the world of business and an ever increasing pressure on business owners to look after their team.
One great way of attracting, motivating and retaining your key team members is to implement a share scheme for your company. There is a lot of information out there and many different schemes to consider so where should you start?
Do you want the team to become shareholders immediately, sharing in capital growth, dividends and having voting rights?
The alternative would be to have vesting conditions. This would mean that your employees could become shareholders in the future once certain conditions are met. This could be as simple as a period of time passing, growth or performance of the business, or perhaps they only become shareholders at the time you sell the business (so they can share in the sale proceeds with you).
Whichever way you chose to go, there will be tax and legal technicalities to consider so you should think this through with trusted advisers to ensure you are aware of the implications.
What’s the best type of employee share scheme for my business?
One of the most popular share schemes around for small and medium sized businesses is the Enterprise Management Incentive (EMI) Scheme. This is a tax-advantaged scheme that ensures there is no charge to income tax on the increase in value between the date of grant of the options and when the employee acquires them.
There are a number of qualifying conditions for EMI Options (for both the company and the employee) and these should be considered to ensure that the favourable tax treatment is not lost.
Shares acquired through an EMI Option should also qualify for capital gains tax rates of 10% with entrepreneur’s relief even if the employee has less than 10% of the share capital (assuming the options/shares have been held for 2 years and other conditions are met).
What if my company or employees don’t qualify for EMI Options?
There are many schemes available, some tax-advantaged and HMRC approved and some not. There will, though, be something to suit your circumstances.
You could avoid a formal scheme entirely and, with share restructuring to avoid any tax consequences, you could allow employees to acquire shares immediately. Alternatively, you could replicate the vesting periods allowed by EMI Options and other schemes in economic terms by issuing all of the shares on day one with appropriate buyback provisions so that if an employee leaves or performance conditions are not met they must surrender their shares.
Care must be taken to avoid an income tax charge and a restricted securities election is a good idea. This election avoids the risk of a proportion of any future increase in value being subject to income tax.
There are, though, a number of alternative schemes that you could consider which we have briefly summarised below:
- a Company Share Option Plan (CSOP) which allows up to £30,000 worth of shares to be put under option at a fixed price. Unlike an EMI Scheme, a CSOP is available to non-trading companies and those in “disqualifying trades”. There is no income tax to pay or NI on the difference between the price paid and what they are worth;
- Save As You Earn Share Scheme (or SAYE Scheme) where employees can save up to £500 each month and use these savings to purchase shares. There is no income tax or NI to pay on the difference between what is paid for the shares and what they are worth;
- a Share Incentive Plan (SIP) where free shares worth up to £3,600 per annum can be awarded to employees. A SIP can also be used to award additional shares (called, matching or partnership shares). The shares must be kept within the plan for 5 years to avoid income tax or NI on their value. There is no capital gains tax to pay if the shares are sold.
These alternative schemes are generally more costly to set up so it is typically larger companies who would look to implement them. All of the above schemes have strict conditions that must be adhered to in order to maintain the tax advantages so advice should be sought early on to ensure that these are met.
Sign up to our newsletter to stay up to date with all of our news, blogs and events