CONSIDERING THE TAX ASPECT
Ordinary Shares and Share Options have their pros and cons. Ordinary Shares are taxable when they are awarded, which can deter some people, but on the plus side they will have voting rights and be entitled to dividends. With Share Options, tax is not usually paid until the option is exercised.
There are also Approved and Unapproved Schemes. Approved Schemes offer more tax advantages but both employers and employees must qualify; Unapproved Schemes are more flexible.
Tax on shares and options through employee share schemes is advantageously low; one of the key reasons for their appeal. Capital Gains Tax (CGT) is paid when ordinary shares are awarded, when options are exercised, and on all shares when they are sold.
All this may already be sounding complex, but don’t worry, we will make it all clear and suggest what’s best for you.
THE EMI OPTION SCHEME
The most popular Share Option is the EMI (Enterprise Management Incentive) scheme. It’s only available to employees spending 75% of their working time for your company. Beyond that, however, it’s reasonably flexible with attractive tax rates and you can grant an employee up to £250,000 of options.
THE EMI Option Scheme is intended for independent developing companies permanently established in the UK, with gross assets up to £30m and fewer than 250 employees. You must be substantially trading in a qualifying industry. There are some activities that companies work in that are excluded from EMIs. Excluded activities are banking, farming, property development, provision of legal services, and ship building. Employees will only pay income tax at exercise on the value of the shares when they were awarded, and the shares will be subject to a lower rate of CGT of just 10%. Subject to certain conditions, there’s also no tax or NIC cost for employers, and they can benefit from corporation tax relief on employees’ sales of shares.
HMRC APPROVED SCHEMES
Approved all-employee schemes
The HMRC approved share schemes are EMI (described above), CSOP, SIPs and SAYE (described below)
Company Share Option Plans (CSOP)
These tend to be used by larger organisations that don’t qualify for the EMI scheme. They are less attractive, as options are granted at market value, the employee must hold the shares for at least three years to avoid income tax on any gains and they are limited to £30,000 of options.
Share Incentive Plan (SIPs)
- Free Shares, where you can give employees up to £3,600 worth of free shares per tax year.
- Partnership Shares, which allow employees to buy an extra £1,800 of shares or the equivalent of 10% of their gross salary (whichever is less) each year.
- Matching Shares, where you can give up to two matching shares for each share the employee buys.
- Dividend shares, where employees can buy more shares using dividends from their Free, Partnership and Matching shares, if permitted by your scheme.
Save As You Earn (SAYE)
A scheme allowing employees to save up to £500 per month for three to five years, then on completing the plan they receive a tax-free bonus and can use the savings to buy shares at a fixed price. There’s no tax on the bonus or interest, and no Income Tax or NIC on any gains made on the shares.
Unapproved options are more flexible, as no HMRC approvals are involved in choosing qualifying employees or the value of shares they receive. You should be able to claim a deduction against corporation tax for an employee’s financial gain when they exercise their options. These schemes are less tax-efficient for employees than Approved options.
Designed to incentivise employees to help grow your company, but they only benefit if performance passes a pre-set threshold. If shares are acquired at market value employees should not pay income tax or NIC on them and 10% Entrepreneur’s Relief on CGT can be available on disposal. These count as a new class of shares, requiring changes to your Articles of Association.
Joint Share Option Plans
Benefits for the employee are similar to Growth shares, but the shares are held in an Employee Benefit Trust and split into Growth interest and Capital interest. Employees acquire growth interest at market value and the shares crystallise at a time specified in the plan. Tax efficient and low risk for employees, but can be complex and expensive to set up and administer.
Whichever scheme you choose, it will be necessary to set a value on your shares. This is easy enough for listed companies, but as a private company it becomes more complex, with a variety of different methods available.
One example is to compare your company with several listed companies of similar size, age, growth and market sector, taking an average of their figures across a range of key metrics. These will concern costs, capital, cash flow, earnings, debt to equity ratio and more. Expert interpretation of all these figures is essential, so we suggest you talk to us as soon as possible, to work out a share valuation.