Share options beat the Christmas bonus

Finding new and inexpensive ways to reward good staff can prove to be very challenging for many businesses. However, incentivising employees in the form of share option schemes can be a great vehicle for rewarding staff especially if you are a new start-up company and you don’t necessarily have the resources to meet your best recruits’ market level salary expectations, writes Naushad Rahman, senior company commercial solicitor, Colemans Solicitors .

Inland revenue approved share option schemes, in particular the Enterprise Management Incentive (“EMI”) scheme, can provide significant
tax advantages to employees. The putting together of EMI schemes is a part of our core expertise here in the Company Commercial Department at Colemans. What’s more the cost of actually setting up and administering the scheme will potentially be a tax deductible expense for your Company against Corporation Tax. EMI schemes can apply for the benefit of both quoted and unquoted companies.

The key tax benefit of EMI schemes is that the employee avoids Income Tax and National Insurance which would normally be charged on the market value of any shares or options granted to them. If the employee is given options under the scheme they are only charged Capital Gains Tax on the increase in value over the option exercise price (ie what they pay for the shares) as long as the price is at or above the
pre-agreed market valuation with HMRC. Capital Gains Tax annual exemptions may apply and Capital Gains Tax rates are generally significantly less than Income Tax rates.

However, there are certain conditions which apply for the Company to qualify:

• The Company must have a permanent establishment in the UK
• The Company must be independent and not under the control of any other Company
• The Company must have fewer than 250 employees
• The gross assets of the Company must not exceed £30 million
• Certain Companies are excluded from suchschemes, for example: those involved inleasing, property development and financial activities.

Equally, there are certain qualifications for employees to actually qualify to be an EMI option holder:-

• The employee must not have a material interest in the Company (i.e. not more than 30% of the Company)
• The employee must work for the Company for at least 25 hours a week or for at least 75% of their paid working time
• Each employee can only hold a maximum of unexercised options worth £250,000 in any 3 year period under the EMI scheme (any further options granted to the employee over and above this sum would not qualify for EMI relief).

Other considerations are:-

• Companies are free to set their own option price which may be more or less than the market value of the shares at the date the option is granted.
• It is not possible to grant any EMI option over redeemable or convertible shares.
• Although the Company is free to set its own option period, the options must only be capable of exercise within 10 years of being granted and be exercised within that period. After 10 years the tax benefits of EMI will no longer apply to the exercise of any outstanding options.
• Your solicitor will need to review your Company’s articles of association in order to ensure that the company may buy-back the shares from the employee who has bought shares under their options agreement if they later leave employment.
• Option shares may be a different class of shares e.g. non-voting, accordingly the articles of association of the Company may need to be re-drafted to create the different share classes.

Share option schemes are a terrific way to keep employees happy in a climate where cash flow will not sustain higher salaries and in any event provide a great incentive and motivation for your employees to make your Company succeed.

Contact our expert Naushad Rahman to create an EMI scheme for your company or read our extensive range of legal articles.

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This post was written by Colemans Solicitors LLP