One of the most often used and valuable of the Capital Gains Tax (CGT) exemptions is...
Recent reports have shown that employees who own shares in a company deliver a better performance and have better relationships with their employer. Therefore, if you do not already have a share scheme for your employees, it might be something to consider.
Once you have decided to go ahead with a share arrangement, the next decision is about the type of scheme.
It is a good idea to seek professional advice to see which type of arrangement will work the best for your business. Here is an overview of some of the main facts to consider.
A Share Scheme or Share Options?
Both share schemes and share options provide employees with the mechanism to own a stake in the company.
In a share scheme the employee is provided with shares directly.
With share options, the employee is given the option to purchase shares at a later date but they are not compelled to do so. The reason that this may be beneficial is that the share price is fixed at the day the options were granted. This means employees may be able to purchase shares at a cheaper price than they are valued at in the future. In some cases, the share options may only be exercised when certain conditions are met, such as the sale of the company.
There are share options and share schemes which are approved by HMRC which means they provide tax efficiencies. Not all share plans are HMRC-approved so it is vital to be clear about the type of arrangement you are offering, and the benefits it will provide to both parties.
Key Differences Between Shareholders and Option Holders
The articles of association and/or shareholders agreement will need to cover every potential scenario relating to the issuing and ownership of shares. They do not need to include any information about share options, so this can make issuing options rather than shares much easier. Most companies adopt the Companies House Model A articles which would need to be reviewed and updated with a specialist’s help.
If the terms of the share options only allow them to be exercised in the event of a company sale, the articles of association and shareholders agreement will not need to be altered as the employees will only be shareholders very briefly.
However, if the share options allow the purchase at other times, there must be due consideration to the potential ramifications which may occur. This includes what happens when an employee has exercised their option and resigns from their position, or if their contract is terminated.
Another key difference is that option holders do not have any of the rights of shareholders until they exercise their options. This means they will not have voting rights by not exercising the options, unlike most shareholders.
If you decide to proceed with a share arrangement, as the employer there are some duties to fulfil:
- Check that the arrangement satisfies the company’s requirements
- Register with the Online Employment-Related Service (ERS) provided by HMRC
- Self-certify any HMRC-approved arrangements
- Communicate details of the available arrangement to employees
- Ensure that you fulfil the terms of the arrangement, such as making it available to all employees
- Check the arrangement does not breach age discrimination legislation
- Ensure the annual reports and accounts include the cost of providing share options
- Ensure all compliance regulations are met e.g. annual returns
Not every arrangement will work for every company so it is important that you choose the one that delivers the benefits you want.
Some of the things that your company may want to consider include:
- Who will be eligible to receive share options
- Whether the options should be transferable
- What happens to the options on key events such as leaving the company or sale of the company
- The exercise price and period
The shareholders will need to approve any share option arrangement before it can be issued.
There are a number of different types of arrangements available to companies. These include:
Company Share Option Plans (CSOPs)
CSOPs are discretionary schemes which may make it preferable to some employers who do not wish to include everyone in an arrangement. A CSOP enjoys the benefits of being tax-efficient while still providing the flexibility for an employer to grant options to specified categories of employee only.
The price at which options are granted must not be “manifestly less” than the market value at the time of issue. No option must be valued at more than £30,000 at the date when it is granted.
Options typically last between 3-10 years under CSOPs, and lapse after the specified time. They are typically also lost when the employment contract is terminated. Special exemptions can be made for options to continue in the event of retirement, death, redundancy, takeover or ill health.
Enterprise Management Incentives (EMIs)
An EMI can only be created where there are fewer than 250 full-time employees (or the equivalent). HMRC do not need to formally approve an EMI scheme but must receive notification within 92 days of the grant of options.
There are very strict conditions that a company must meet to be able to qualify as offering an EMI scheme. Options granted must be valued at less than £250,000 and the total value of all options granted must not be more than £3 million.
EMI schemes were created to allow companies to retain highly skilled individuals rather than having to issue share options to all employees.
Share Incentive Plans (SIP)
A SIP is another type of tax-efficient arrangement that must be available to all employees. However, the company can provide different types of shares: free shares, partnership shares and matching shares.
The tax-efficient elements are only available providing a number of conditions are met. Providing the criteria is fulfilled, no tax or national insurance charges arise from a SIP.
Save As You Earn (SAYE)
A Save As You Earn scheme is also known as a Savings Related Share Option Scheme and provide the employee with the option to exercise share rights in return for regular payroll deductions.
At the start, the employee agrees to a contract of deductions; when this expires they are able to exercise their option to purchase shares.
All employees must be included on SAYE schemes but there can be variations based on salary, length of service, hours and seniority.