A key consideration for any business is to ensure that the people who are driving the business forward are happy, bought in to the future direction and goals of the company and appropriately incentivised for reaching those goals. For more information on how to implement the right share scheme for your company, please join our webinar on 22 June HERE
If you would like to offer management a path to share ownership, we can help in creating a structure that works for you and them.
There are a number of different options depending on your individual circumstances, and we have explained the pros and cons of each below:
Enterprise Management Incentive (EMI) Share Options
An EMI is a government‑backed, tax-advantageous share options scheme. It is mainly used by small to mid-sized UK businesses looking to share their successes with their team as their company grows.
An EMI allows you to not only reward your employees with options and having tax advantages, but also offset both the cost of the scheme and the tax benefits achieved by your employees against your company’s tax liability.
EMI options schemes are relatively flexible, in terms of both the conditionality and the time frames that can be set as part of their terms. You also can set conditions for recipients, including performance or length-of-service milestones
Providing an Enterprise Management Incentive scheme can be an effective way for businesses to reward and retain staff by granting them share options in a tax-efficient way. It also allows the shareholders to retain control if the options are framed correctly.
There is no tax on grant of an EMI option.
The exercise of EMI options is not subject to income tax or employees’ National Insurance (NI) Contributions, provided the shares are purchased at a price which is at least equal to their market value when the employee was granted the option. Capital gains tax will normally be due on disposal of the shares.
Unapproved Share Options
Not all businesses will qualify for EMI, and therefore many businesses will look to implement an unapproved share option scheme. In some instances, this can be the same right to acquire shares under EMI but without the tax benefits.
Historically, unapproved share options are seen as tax-inefficient, but tax inefficiencies can be limited by the way the unapproved share options scheme is structured.
Unapproved share options are often exit based, meaning that they incentivise employees to work towards an exit by providing share options that are only exercised on an exit.
As with approved options, there is no initial tax cost up-front. Any gain on exercise will be taxed as employment income. If the shares acquired are then sold at a later date, capital gains tax will be charged.
If structured correctly, growth shares are a cost-effective and tax-efficient way to provide key members of the management team with access to shares whilst incentivising them to grow the value of the business for their own personal benefit.
Growth shares also offer potentially significant tax savings to both employees and the employer. Due to the lack of economic entitlements when the growth shares are acquired, their full unrestricted market value should be relatively low, reflecting the fact that they have a ‘hope value’ only. The tax cost to employees of acquiring their growth shares is therefore made more affordable and the downside risk to employees is also reduced.
Growth shares are commercially flexible and can therefore be made forfeitable on employees leaving, with relevant restrictions or rights applying in relation to votes, dividends and other shareholding rights. Performance or time-based vesting triggers can also be added.
If employees pay full market value for their growth shares, there should be no income tax or NI contributions liabilities on either the acquisition of the shares or on their growth in value. Capital gains tax will normally be due on disposal of the shares.
A phantom share scheme allows the employer to achieve some of the benefits of employee share ownership without actually giving any shares to employees.
In essence, it is a cash bonus scheme.
Typically, each employee is granted a number of notional share options such that bonuses are calculated by reference to the notional gain on the shares, (subject to the deduction of income tax and NI contributions).
The phantom share option plan is linked to the performance of the company as bonuses will be linked to any increase in the value of the company.
The tax treatment of phantom option is the same as a normal cash bonus. No tax is payable on the grant, but any phantom payments will be subject to income tax and NI.
Profit Sharing Schemes
Rewarding and incentivising management can also be achieved by awarding them a percentage of the company’s profits. Whilst this may not be the most tax-efficient way to reward your management, it is a viable alternative if you are not prepared to offer shares.
Putting into place the right scheme is a matter which requires specialist advice from a tax, accountancy, and legal standpoints.
In most cases, you will need to deal with the following matters:
- Legal documentation for the shares or options (shareholders agreements or option agreements)
- Share allotments
- Share Certificate
- Board Minutes
- Company Secretarial
- Option grant documentation
Share Schemes should be on the agenda for all fast-growth companies, in order to:
- Attract and retain the best people over longer periods of time.
- Align interests by giving management a sense of ownership in your company.
- Reward those who help you grow the business by enabling them to share in its success.
- Benefit from a more committed and engaged workforce: businesses with shares schemes tend to outperform businesses that don’t share ownership with employees.
- Tax breaks – gains on shares can be delivered at tax rates between 0 – 20%
Fusion has implemented numerous schemes to ensure the correct trade-off between all of these factors and when working with us you can be rest-assured that all advice is given in-line with our 360o advisory approach.