Employee shares schemes: a great way to attract and retain your brightest talent

Rebecca Davison, director and head of tax at Parsons York, introduces this ever more popular way to “lock-in” talent.

Example:

Sophie receives an option over 1,000 B Shares with a value of £10 per share as agreed with HMRC. The options may be exercised at 10 years or on the company being sold.

At Year 7 the company is sold. Sophie pays £10,000 for the shares and therefore has no charge to income tax. She immediately sells her shares at full market value (£100 per share), making a £90,000 profit.

Sophie pays capital gains tax (CGT) on the £90,000 at a rate of 10% as she qualifies for Business Asset Disposal Relief.

Employee share schemes can be a powerful way to encourage employees to think like business owners. Allowing them to acquire company shares nurtures an increased sense of loyalty and fosters positive morale, whilst a focus on bigger picture objectives can also drive improved business performance, profitability and resilience.

Common HMRC approved schemes include Enterprise Management Incentives (EMI), Company Share Option Plans (CSOP), Share Incentive Plans (SIP) and Save As You Earn schemes (SAYE). All of these are “tax advantaged” meaning employees can often acquire shares in their employing company at a reduced price without incurring tax or national insurance. Succession planners may also consider an Employee Ownership Trust (EOT).

The most common conversations we are having with clients on this subject involve EMI or EOT so we’ve spotlighted these below.

Enterprise Management Incentives

(EMI) provide a right to acquire shares at a future date at a price per share fixed at the outset. The scheme is governed by rules that determine the terms on which options are granted and when they can be exercised. Options are either exercised on a time basis (e.g. after 5 years), a target basis (a predetermined growth threshold), on company sale or, a hybrid of these. There is no tax liability arising on grant of the options or on exercise if the employee buys the shares at the market value at the grant date.

Employee Ownership Trusts (EOT) provide an excellent succession plan in the right circumstances by enabling a company to become owned by its employees. The company shares are held in trust for the benefit of all employees, and bonuses can be paid free of income tax up to £3,600 per employee per tax year. The owner sells a controlling interest of the company shares to the EOT but that’s free of capital gains tax. They can continue to work in the business whilst receiving market rate remuneration.

These schemes can be complex so always seek expert financial advice. Our team can help you weigh-up the benefits and any potential risks – we’d love to hear from you.