Employee Shareholder Incentives

Seize the Day - Time to Consider!

This government has put a significant emphasis on employee share ownership as being one way to help businesses develop.

Many owner managed businesses see employee share ownership both as way to incentivise and retain key employees, and as a way to develop a succession plan for the business.

There are numerous ways to structure an employee share incentive scheme, we have set out below some of the most popular/topical methods available, however, every scheme needs to be bespoke to reflect the commercial position of the particular business. As such, we recommend an initial discussion so that the options can be considered and the right scheme designed.

Enterprise Management Incentives

Enterprise Management Incentives (“EMI”) share schemes are share option schemes that satisfy certain HMRC requirements and benefit from advantageous tax treatment.

Companies can grant options over shares to employees and, if desired, make the exercise of those options conditional on performance or passing of time.

The advantages of EMI schemes include:

  • no income tax or National Insurance contributions (“NICs”) on grant of the options;
  • no income tax or NICs on exercise of the option (as long as the exercise price is set at a value equal to or greater than the market value of the shares on the date the option was granted);
  • on disposal of the shares acquired pursuant to the EMI scheme (“EMI Option Shares”), the individual’s gain is subject to capital gains tax (“CGT”) at a lower rate than income tax;
  • Entrepreneurs’ Relief (“ER”) may now be available on the disposal of EMI Option Shares, meaning gains on disposal may be taxed at just 10%;
  • the company may also be able to benefit from a corporation tax deduction that crystallises when the options are exercised;
  • granting options may help align employee and shareholder interests; and they can be a cost effective way to reward employees for increasing the company’s value.

Employer Shareholder Status

In 2013 the new “employee shareholder” status was introduced. This scheme allows employees to receive shares in return for giving up certain employment rights. The first £2,000 worth of shares will be exempt from Income Tax on award, and shares worth up to £50,000 at award will be exempt from Capital Gains Tax on sale. Prior to award of the shares, employees must be provided with free independent legal advice concerning their employment rights.

Employee Ownership Trust

To incentivise the creation of new indirect employee ownership structures, an individual disposing of their shares to an Employee Ownership Trust “EOT”, leading to a controlling interest in the company being held by the EOT, will be treated as being making the disposal at nil gain nil loss so that no CGT arises. This treatment applies irrespective of the consideration the individual receives for the shares, and therefore presents a potentially tax free exist strategy.

 

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