Employee share schemes
There are a number of employee share schemes designed to incentivise and retain employees in a company. Each scheme has its own tax consequences and reliefs and RMT can provide expertise and guidance to choose the correct scheme for your business.
Employee share schemes usually fall into two main categories:
- Approved share option schemes
- Unapproved share option schemes
Approved share option schemes
The most common and tax efficient approved share option scheme is the Enterprise Management Incentive Scheme (“EMI”).
EMI schemes are HMRC approved tax-advantaged share option schemes designed for smaller companies. They allow a company to grant options to selected employees to enable them to acquire shares over a period of time at a set price.
The main benefit of EMI schemes is that no Income Tax arises and no NIC is charged when the EMI options are granted and potentially no Income Tax or NIC chargeable when the options are exercised. In addition, EMI option shares exercised and ultimately sold, can now benefit from the 10% Entrepreneurs’ Relief Capital Gains Tax rate.
RMT has vast experience of implementing such schemes with a number of our clients and we can advise you on:
- The scheme rules applying to ensure you meet the qualifying conditions;
- Obtaining advance clearance from HMRC that you meet the conditions;
- Where available, agreeing an upfront valuation of the shares under option with HMRC;
- Reviewing the various legal paperwork drafted by your solicitors in respect of the scheme chosen to ensure it is effective from a tax point of view; and
- Providing ongoing scheme administration including the annual reporting requirements to HMRC.
Unapproved share option schemes
A company may ultimately decide to grant share options outside of the approved schemes shown above. These unapproved schemes do not benefit from the attractive tax reliefs of the approved schemes and as a result, the employee could be subject to income tax and NIC when the options are granted and exercised.
As an alternative to approved or unapproved share option schemes, a company may decide to introduce growth shares allowing employees to participate in the future value of the company and allowing current shareholders to lock in the historic value of the company.
Growth shares are a separate class of shares which usually only participate in an exit event when the value of the company exceeds a future pre-determined value (commonly known as the Hurdle).
The benefit of growth shares is that at the point the employee acquires the shares, they have limited, if any, economic entitlement and as such will have a low initial acquisition cost.
However, whereas in the past HMRC have provided a service to agree the value of such shares after acquisition for Income Tax purposes, this service has now ceased and a robust Tax Valuation should be carried out as part of the process so that the company has contemporaneous evidence of their valuation methodology should HMRC request information at a future time.