SHARE SCHEMES
There are a number of different types of share schemes used by companies for a number of different reasons.
They are generally seen as a way of incentivising key members of staff to stay with the company for the long term and to reward them in a way that is comparable to the success of the business.
Legislation has been introduced over recent years to seek to charge income tax on share schemes to the extent that value has passed to employees.
There are ALL employee share schemes such as SIP and SAYE which tend to be found more in quoted companies and there is CSOP which rewards key employees. Those are approved share option schemes however as they have limits set on how much value can be passed they are sometimes used in conjunction with unapproved share option schemes. Unapproved share options tend to attract higher tax charges but are used as a top up for senior management.
One particular type of share scheme which is not available to all types of business but attracts tax breaks from the Inland Revenue is the Enterprise Management Incentive Share Scheme. This tends to be most favoured for unquoted family businesses.
One of the benefits of this share scheme is that it is one of the few occasions where you can agree the valuation of the company with the Inland Revenue in advance of granting the option thus ensuring no income tax charge arises.
The way it works is that a company grants an option over shares to an employee. At that time the employee does not have any shares and cannot interfere in the governance of the company; all they have is a right to obtain shares at a date in the future as long as certain criteria are met. The company would set out the criteria which can include performance targets. If the employee leaves employment whilst he still has the option then it can lapse. If structured correctly the individual should have no tax liability on the grant or exercise of the option and when they eventually sell the share they would hope to benefit from business asset taper relief which could mean that they only pay capital gains tax at an effective rate of 10% tax. However after 6 April 2008 they will face the new flat rate of 18% on the sale of the shares, which is still an improvement on the tax suffered in paying a bonus.
Compare that to paying an individual a bonus to reward them for their hard work, on which they may have to pay income tax at higher rate of 40% and employee’s National Insurance of 1%. It also costs the company in the form of employer’s National Insurance of 12.8%. Also once the bonus is paid the employee could leave so it generally rewards for past performance rather than future performance.
If you are looking to grow a business which you then want to sell or float within 10 years and you know that there are key staff that are crucial to that success then the use of a share scheme could be just the answer.
What if your company shares do not qualify for EMI?
Instead of unapproved share option schemes which tend to attract income tax charges at 40% rather than capital gains tax at maybe 10% (18% post 6th April 2008) it may be possible to put in place a share incentive scheme that involves a co-ownership of the shares from the beginning rather than an option agreement. The employee would benefit from the growth in the share value and most of the growth would be taxed to capital gains tax instead of income tax. So this is a real alternative to EMI.
Share Schemes and ISAs
If you have shares options under an approved all-employee share scheme it is possible to transfer those shares directly into an ISA as long as the transfer takes place within 90 days of the date on which the investor exercises his option and the transfer is restricted to the annual subscription limits.
There are a number of different types of share schemes used by companies for a number of different reasons.
They are generally seen as a way of incentivising key members of staff to stay with the company for the long term and to reward them in a way that is comparable to the success of the business.
Legislation has been introduced over recent years to seek to charge income tax on share schemes to the extent that value has passed to employees.
There are ALL employee share schemes such as SIP and SAYE which tend to be found more in quoted companies and there is CSOP which rewards key employees. Those are approved share option schemes however as they have limits set on how much value can be passed they are sometimes used in conjunction with unapproved share option schemes. Unapproved share options tend to attract higher tax charges but are used as a top up for senior management.
One particular type of share scheme which is not available to all types of business but attracts tax breaks from the Inland Revenue is the Enterprise Management Incentive Share Scheme. This tends to be most favoured for unquoted family businesses.
One of the benefits of this share scheme is that it is one of the few occasions where you can agree the valuation of the company with the Inland Revenue in advance of granting the option thus ensuring no income tax charge arises.
The way it works is that a company grants an option over shares to an employee. At that time the employee does not have any shares and cannot interfere in the governance of the company; all they have is a right to obtain shares at a date in the future as long as certain criteria are met. The company would set out the criteria which can include performance targets. If the employee leaves employment whilst he still has the option then it can lapse. If structured correctly the individual should have no tax liability on the grant or exercise of the option and when they eventually sell the share they would hope to benefit from business asset taper relief which could mean that they only pay capital gains tax at an effective rate of 10% tax. However after 6 April 2008 they will face the new flat rate of 18% on the sale of the shares, which is still an improvement on the tax suffered in paying a bonus.
Compare that to paying an individual a bonus to reward them for their hard work, on which they may have to pay income tax at higher rate of 40% and employee’s National Insurance of 1%. It also costs the company in the form of employer’s National Insurance of 12.8%. Also once the bonus is paid the employee could leave so it generally rewards for past performance rather than future performance.
If you are looking to grow a business which you then want to sell or float within 10 years and you know that there are key staff that are crucial to that success then the use of a share scheme could be just the answer.
What if your company shares do not qualify for EMI?
Instead of unapproved share option schemes which tend to attract income tax charges at 40% rather than capital gains tax at maybe 10% (18% post 6th April 2008) it may be possible to put in place a share incentive scheme that involves a co-ownership of the shares from the beginning rather than an option agreement. The employee would benefit from the growth in the share value and most of the growth would be taxed to capital gains tax instead of income tax. So this is a real alternative to EMI.
Share Schemes and ISAs
If you have shares options under an approved all-employee share scheme it is possible to transfer those shares directly into an ISA as long as the transfer takes place within 90 days of the date on which the investor exercises his option and the transfer is restricted to the annual subscription limits.