Taxefficient employee share options

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Tax-efficient employee share options

• Click to see a PowerPoint presentation
• By
• Mark Simpson

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How an employee share option works

• An employee is granted an option to buy shares in
  the employer company at todays market price.
• Assuming that the price goes up, the employee may
  exercise that option to acquire the shares at
  todays price.
• The purpose of an employee share option is to act
  as an incentive for the employee to help to
  ensure that the value of the employing company
  increases.

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The tax problem with employee share options

• Where an employee exercises a normal share
  option, he or she pays income tax on the increase
  in value between grant and exercise.
• Thus, if we assume a key, well-remunerated
  employee, 40 of the benefit of the option will
  disappear in tax. Next year, potentially, this
  tax cost could increase to 50 plus a loss of
  personal allowances.
• Even worse, if the employee retains the shares
  there is no extra cash with which to pay this
  tax.
• This is a particular issue with unquoted
  companies, where no ready market for the shares
  exists.

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The solution Enterprise Management Incentive
Schemes (EMIS)

• Available on grants to selected employees
• Must be to attract or retain key employees
• Company can write its own scheme rules
• Options must be exercisable within 10 years of
  grant
• Objective performance targets can be set
• Notably not available for anyone holding 30 of
  company shares

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The tax benefit of EMIS

• The growth in value of the shares between grant
  and exercise of an EMIS option is not subject to
  income tax at the point of exercise.
• Instead the whole gain between grant and sale is
  subject to capital gains tax on sale, at 18, or
  10 if the employee holds at least 5 of the
  company shares.

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Other features

• Some trades are excluded (broadly perceived lower
  risk or property-backed activities).
• It is possible to issue options over different
  classes of shares, with different dividend rights
  etc.
• Options can be made to lapse if the employee
  leaves.
• General pre-emption rights are required to oblige
  an employee to dispose of shares if he or she
  leaves.

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Summary

• A powerful and tax-efficient incentive for
  selected key employees.
• Employers can protect against employees leaving
  holding options or shares.
• Performance targets can be set.
• Share valuations can be agreed in advance with HM
  Revenue Customs.
• Employers can devise their own scheme rules.

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How do you implement this

• Phone Mark Simpson on either
• 0161 886 8060
• 07876 746403 - mobile
• OR
• Email mark.simpson_at_sbnca.com