Taxing Times

Using share schemes to incentivise key staff

The point about share schemes is that, if used right, they can be a great incentive. And there are lots of different share plan routes available and lots of ways such incentives can be made bespoke to fit the company’s requirements. 

The article below briefly touches on a chosen few ways to incentivise staff with shares, but it by no means covers all the variations.  So if you are considering putting a share scheme in place, talk to your adviser (hopefully us!) so s/he can design one on a bespoke basis that gives you exactly what you want to achieve.

Share awards

The outright share award is potentially the simplest way of doing things – someone gets shares and immediately they become a shareholder with entitlement to whatever rights those shares have.  So for example, they could share in dividends straight away. It is very clear to the shareholder what they are getting out of it and they can feel a real sense of ownership straight away.  So as an incentive that is a real positive.  But there are considerations about what the person has to pay to buy in – how do they afford to buy in? How do the existing shareholders feel about sharing the historic value retained in the company with the newcomers? What are the tax consequences if the employees don’t pay “market (3rd party) value”? Dealing with all of these questions will be part of designing your company’s share award plan.


Growth shares

There is a way of awarding shares called a Growth plan. This is still an outright share award with lots of positive messages.  But a growth share creates a new class of share which only has rights to the value of the company going forward – so the value of the company to date is ring-fenced for the existing shareholders.  That can make existing shareholders feel a lot more comfortable and makes it much more affordable for the new growth share holders to buy in (or be given the shares with a very low up front tax cost).  Growth shares are potentially a really good option. But they do have to be written properly to make sure they work as intended.

Enterprise Management Incentives (EMI)

The EMI is, from a tax perspective, an excellent plan.  It is an option plan – so not an outright award of shares but a promise to allow someone to acquire shares at a point in the future.  EMI plans are highly flexible because you can design performance criteria and exercise conditions into them.  The clock starts ticking for Entrepreneurs’ Relief (permitting a 10% capital gains tax rate) from the date of grant not exercise, and any tax bill/cost of acquisition is fixed at the date of grant not exercise, so they act like a share award from that perspective.  No tax or NIC is due when the option is granted and generally no tax or NIC is payable on exercise.

They are also an HMRC approved plan so you know if the conditions are met HMRC will have no issue with the arrangements – and you can get them to agree the value of the options before you go ahead with the plan which can provide real peace of mind. When the employee exercises the option, s/he becomes a real shareholder and from that point can take dividends (if permitted – they don’t have to get dividends if you don’t want them to) and share in sale proceeds on a takeover etc.

Because they are an approved scheme with great tax benefits, the EMI comes with a number of conditions to be met.  Some are for the company, such as it must have gross assets of less than £30m and must not be under the control of another company (so you cannot have EMI plans in subsidiaries, for example).  Some are for the employee, for example s/he must work for a minimum of 25 hours a week or 75% of their working time. And the company cannot operate in particular business arenas, for example, you cannot put EMI plans into companies which are farming, banking or in property development (to name a few).

Time out to think about the practicalities

Putting in place a share scheme means there are also commercial/practical things to think about;

  • Will you want to use a new class of shares?  The answer is generally yes, because that allows flexibility, so you can make the employee share non voting (if you want) or non dividend bearing (if you want) or pay different rates of dividends to management than you do to the other shareholders. And you will definitely need a new class to do growth shares. So the company’s articles will need to be updated.
  • You will also need to think about whether the employee’s shares are permitted to vote and get dividends – they don’t have to be, it depends on what you see as key to incentivising the staff.
  • A fundamental thing to think about is the transfer and leaver provisions for these shares – what if the employee leaves?  Will he be allowed to keep on owning the shares (or have the right to an EMI option) when he no longer works there? Will someone who leaves on good terms i.e. because they retire, be treated differently to someone who leaves on bad terms?  Generally in owner managed businesses the answer on transferring shares/keeping them after leaving is a firm “no” – but you must write that down very explicitly and agree it upfront as part of the share scheme paperwork.
  • For an EMI (or other HMRC approved scheme) you have to register the share scheme within a very specific timeframe otherwise the tax benefits are all lost.

If you have any queries about share plans, or want to discuss putting a share plan in place, please contact Kathryn Brown.

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