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Using share schemes to attract and retain employers

Tiina Weekes, Director, Corporate Tax
15/09/2021
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With the pace of the vaccination programme and lifting of pandemic restrictions, many are expecting the recruitment market to become more fluid in the coming months. Employees who may have paused a job move while working remotely, will likely be reviewing their options as more businesses return to their offices. Business owners looking to retain talent may be wondering what’s their next move?

Share schemes are not just for multinationals – they can also offer an ideal employee reward solution for smaller companies seeking to attract and retain employees with key skills. Savvy employees are aware of the benefits available in the marketplace and have expectations that go beyond the basic salary.

The key challenge for small, medium and start-up employers is competing financially with large companies, when it comes to attracting and retaining staff. Share-based remuneration offers an ideal solution as the initial cash cost is generally modest, while ensuring that employees are rewarded for their contribution to business growth.

Offering employees, a stake in the company through share-based remuneration increases commitment, motivation and leads to higher profits. Employee ownership can help to resolve issues such as high staff turnover and retain key individuals within the business.

UK tax rules provide several options in designing attractive and workable share schemes. When choosing a scheme, employers and their employees should be clear on their understanding of the objectives of the scheme, whether it is to retain key employees for the long term, reward employees for past performance or allow key employees to share in the proceeds from a possible sale of the company, in the near to medium term.

Common share-based schemes currently available in the UK

Employee share options

A share option granted to an employee allows the employee to acquire shares in a company at a predetermined price (exercise price) in the future. The options may be subject to performance related conditions or may have restrictions as to when they may be exercised (e.g. only exercisable prior to a sale of the company).

For the employer, in the event of the employee exercising the options, the company obtains corporation tax relief via a reduction in taxable profits equal to the value of the shares acquired less the price paid by the employee.

The tax treatment for the employee will depend on whether the options are:

  • EMI options
  • CSOP options 
  • unapproved options.

Enterprise Management Incentive options

Enterprise Management Incentive (EMI) is an extremely tax efficient share option scheme for qualifying companies and qualifying employees.

No income tax or NIC is payable on exercise of the option, if the option is exercised within 10 years and the exercise price is not less than the market value of the shares at the date of grant of the options. Agreement of market value can be obtained from HMRC prior to the option grant.

If the options are granted at a discount, with the exercise price being lower than the market value at the date of grant, then income tax (and possibly NIC) will be payable on exercise but this will be based on the market value at the date of grant (not the date of exercise), less the exercise price paid. The disposal of the EMI shares will generally be subject to Capital Gains Tax (CGT), based on the difference between the disposal value and the exercise price (or market value at the date of grant where options are granted at a discount). The CGT rate on sale is currently 20% for a higher rate tax payer or 10% if business asset disposal relief is available.

There are a number of conditions that must be met for business asset disposal relief to apply to a sale of shares. Some of these conditions are relaxed for shares acquired via the exercise of EMI options so a disposal of EMI shares may qualify for the reduced 10% CGT rate even if the individual has not held 5% of the ordinary share capital/votes/economic value for two years prior to the sale. The EMI options must, however, have been granted more than two years prior to the sale.

There is a £250,000 limit on the value of EMI options that may be granted to an employee. There are a number of qualifying conditions to be met by the company (including trading activity, gross assets and employee numbers) and employee (hours worked). In view of the qualifying conditions, EMI options may not be available to all companies but, if the conditions are met, then it is the most tax efficient share option scheme currently available.

Company Share Option Plan

A Company Share Option Plan (CSOP) is another tax advantageous share option scheme which has fewer qualifying conditions than EMI but there is a £30,000 limit on the value of CSOP options that may be granted to an employee.

The exercise price cannot be lower than the market value of the option shares at the date of grant. Agreement of market value can be obtained from HMRC prior to the option grant.

No income tax or NIC arises on the exercise of the options if the exercise takes place between the third and tenth anniversary of the option grant.

CGT will be payable on the sale of the shares based on the disposal value less the exercise price paid. The CGT rate on sale is currently 20% for a higher rate tax payer or 10% if business asset disposal relief is available. Unlike for EMI options, there is no relaxation of the 5% ownership requirement for business asset disposal relief to apply.

Unapproved options

Income tax, and potentially NIC, will arise on the acquisition of shares based on the value of the shares at the date of acquisition less the price paid. These are not tax efficient but may be an appropriate ‘top up’ to EMI and/ or CSOP options for key employees.

Acquisition of shares outside an option scheme

Employees can acquire shares outside of an option scheme. This may be appropriate if a company does not want to set any vesting conditions on the share award, and is happy for the employees to acquire shares from the outset.

The tax treatment for the employee is the same as for unapproved options. As for employee share options, the company will obtain corporation tax relief on the acquisition of shares by the employee, based on the value at the date of acquisition less the price paid.

Growth shares

Growth shares are a separate class of share. They participate in the future hopeful value of the company and, usually have no rights to the current value of the business. The shares are often subject to hurdle or target values, which the company must meet before the growth shares have any entitlement to the value of the company. The existing shareholders keep the value already built up in the business. Income tax, and potentially NIC, will arise on the acquisition of the shares based on the value of the shares at the date of acquisition, less the price paid. The market value of the shares is often quite low initially, as no existing value is being passed to the employee. The value is restricted to 'hope value'. This minimises the up-front income tax liability for an employee on acquisition of the shares.

It is possible to grant EMI options and/or unapproved options over growth shares, or the growth shares can be issued outside a share option scheme.

How can Crowe help you decide?

The above is a brief overview of some of the common employee share schemes. If you would like assistance in developing an employee incentive scheme for your business, please contact Shaun Young, or your usual Crowe contact.

Insights

Offer shares, options or other securities to your employees or directors? If so you need to act by 6 July 2021.
We look at what the impact of Brexit will be on Enterprise Management Incentive schemes.
Updates to the ‘Loan Charge’ now effective, don’t miss the upcoming deadlines.
An update to EMI share option scheme for furloughed employees.
Offer shares, options or other securities to your employees or directors? If so you need to act by 6 July 2021.
We look at what the impact of Brexit will be on Enterprise Management Incentive schemes.
Updates to the ‘Loan Charge’ now effective, don’t miss the upcoming deadlines.
An update to EMI share option scheme for furloughed employees.

Contact us

Shaun Young
Shaun Young
Director, Share Plans and Employment Tax
London