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Employee Share Schemes and Incentives
JMW's corporate team has a wealth of experience in advising businesses when putting in place tailor-made employee share schemes and incentives for many different types of company. With future plans and exit strategy our focus, we aim to ensure all of your long-term goals are achieved.
Contact JMW today for more information about how we can help you to implement effective share schemes that meet your goals. Call us on 0345 872 6666 or allow us to contact you by leaving your details via our online enquiry form.
Entering a Share Scheme
A company may wish to consider share schemes for its employees for a variety of reasons, such as:
- To encourage an employee to remain with the company until a key defined target or objective is achieved, such as performance targets, a sale or listing
- To reward employees ahead of a potential sale for their loyalty
- To permit employees to obtain and sell shares in a tax-efficient manner over a period of time, helping to increase motivation and performance
Before entering into any share schemes, shareholders should ask themselves whether they would be content to extend share ownership and they should be fully aware of the implications of doing so. For example, the effect of granting voting and dividend rights and also the potential issues arising from minority shareholder rights.
Different Types of Share Scheme
Employee share schemes can involve the donation of free shares to employees, granting them options to purchase shares at a pre-determined price after a fixed-time period or after achieving agreed targets, or matching employee purchases of shares with those offered for free or at a discount.
Employee share schemes should be tailored to match the specific needs and goals of the company. They may, for example:
- Award shares or grant options dependent on achieving a certain defined target or objective
- Permit employees to become shareholders only on the sale or flotation of the company
- Limit the scheme to certain key employees
- Require an employee to have served a certain number of years of service
It is possible to run a combination of various employee share schemes and/or provide more favourable terms for different categories of employees.
Company Share Option (CSOP) Plans
In CSPOs, employers can grant employees options of up to £30,000 worth of shares each. The share price is fixed on the day the option is granted and must not be lower than the market value of the share on the day of grant. Employees may exercise their options after a specified period at the fixed price and not at the potentially higher market price at the date of exercise of the option.
If they then sell the shares at a profit (and certain conditions are met), no income tax or National Insurance contributions (NICs) are payable on the gain. Capital Gains Tax may be payable if gains exceed the employee's annual allowance. The business may obtain corporation tax relief for the costs of establishing and administering the CSOP and for the cost of providing shares under the scheme. Before granting options to employees, HMRC approval must be obtained.
Enterprise Management Incentive (EMI) Schemes
Since their introduction in 2000, EMI options have proven very popular. Options may be granted with a market value of up to £120,000 for each selected employee and up to £3 million for all employees. Eligible employees must work a minimum of 25 hours a week or 75 per cent of their working time in the company. Approval from HMRC is not required in advance, but it must be notified within 92 days of the grant of any options. Corporation tax relief is available for the cost of providing the shares to employees.
Only independent trading companies or trading groups with less than £30 million in gross assets may grant EMI options, and trading activities must be carried out mainly in the UK. Certain business sectors are excluded.
There is normally no income tax or NICs to pay when options are granted, nor when they are exercised if the option price is at least the market value of the shares when the options were granted. Options must be exercised within ten years.
The employee pays tax when they sell the shares. Capital Gains Tax is payable (after the annual CGT allowance) at 18% or at 10% if the employee has held the shares for one year and qualifies for Entrepreneur's Relief (which requires holding at least 5% of the share capital). This compares with income tax rates of up to 40% on exercise of non EMI options or options that are not granted under other HMRC-approved share schemes. Employer's NIC can become payable on the gain if the option is exercised at the time of a company sale or if the shares become tradeable on a public market.
Why Choose JMW?
The corporate law solicitors at JMW are experts at structuring and implementing HMRC-approved employee share schemes. We work closely with specialist share valuation departments at leading accountants.
We have experience advising on implementing the following schemes:
- Company share option plans (CSOPs)
- Enterprise Management Incentives (EMI schemes)
- Employee Benefit Trusts (EBTs)
- Bonus schemes