Finance Act 2017 saw the welcome introduction of the new share options scheme, KEEP. This scheme is likely to be of benefit to employers who wish to award employees the opportunity to earn a bonus based on future share price performance without them necessarily becoming long-term shareholders in the company.
How the scheme works
KEEP applies to qualifying share options granted between 1 January 2018 and 31 December 2023.
In summary the scheme works as follows:
The scheme entitles employers to award a bonus, contingent on share price appreciation, that is not subject to income tax, PRSI or USC. Instead it is subject to CGT rates, although it is a little disappointing that, unlike the UK’s Enterprise Management Incentive (EMI) scheme, there is no easing of the conditions for the 10% CGT rate under Entrepreneur Relief to apply to shares issued under the KEEP Scheme.
Advantages of the scheme
Some disadvantages of the scheme:
In some cases, an employer may wish to award shares directly to some key employees. In addition to giving them a greater sense of responsibility and incentivising them to drive company performance, it may also serve to instil loyalty to the company. Unlike the KEEP Scheme, this allows the employer to give the employee some of the existing value in the company.
Where an employee is given shares in their employer company, they are subjected to Income Tax, PRSI and USC on the market value of those shares. Furthermore, the tax is payable at that time even though they most likely won’t have realised any value from the shares.
The tax legislation however provides for a reduction in this tax liability where a time restriction is placed on the employee’s entitlement to dispose of the shares. The reduction in the taxable value of the shares can be as high as 60%, as illustrated in the table below.
The downside is that the tax liability, although greatly reduced, will still be payable up-front even though the employee will not be in a position to realise any value in the shares for a number of years. It may however be possible for the employer to give a loan to the employee to pay this tax liability, although this carries tax and commercial implications of its own and would have to be carefully structured.
Benefits of the Scheme:
Which scheme is best for you?
Each business will need to weigh up the benefits and downsides of each scheme and ascertain if they meet their objectives at that particular time. As noted above, KEEP is more likely to be suitable where the intention is to offer staff the opportunity to earn a bonus based on share price performance while the Restricted Share Scheme may be more suitable where the intention is to introduce a small number of key employees as long-term shareholders.
If you would like assistance in developing an employee incentive scheme for your business, please contact a member of our tax team.