In the UK, the granting or exercising of share options, as well as the gift of existing shares to employees or directors, are taxable events which can lead to an employer/employee facing tax bills of up to 65% of any share value.
To avoid this exposure, it is vital to take professional advice and to consider adopting one of HMRC’s approved tax-efficient option plans. Below is a brief overview of these plans.
Approved Share Option Schemes
There are currently four HMRC approved share option schemes available:
- Share Incentive Plan (SIP)
- Save as you Earn (SAYE)
- Company Share Option Plan (CSOP)
- Enterprise Management Incentive (EMI)
The first two options of SIP and SAYE are relatively low value schemes which are usually only used by very large organisations to provide incentives for a substantial workforce. Where adopted, these schemes must be made available to all employees, including part-time employees who should be treated in the same way as full-time employees on a pro-rata basis.
The CSOP and EMI schemes are discretionary schemes allowing a significant award of share options with more favourable tax treatment than unapproved schemes. For example, below is an overview of the EMI scheme.
- EMIs reward staff in a tax efficient manner, ensuring employee retention, and aligning the objectives of the staff with the long term goals of the business.
- Key employees enter into “options agreements” to purchase shares (at a “market value” discounted and agreed with HMRC), subject to a number conditions, such as performance. These conditions are incredibly flexible, and we work closely with you to design these. In particular, it is possible to ensure that the ADs can benefit from greater equity if their business area is more profitable.
- When implemented correctly, any growth in value of the shares will be completely outside of income tax, and the employees will be able to benefit from Entrepreneurs Relief on sale (reducing the effective rate of tax to only 10%).
- The end result is significant tax advantages to the employee, and employee retention for the employer.