Share Incentive Schemes
Company Share Option Plan (CSOP) which can be offered to selected employees, usually key people they wish to retain. A brief synopsis of these two schemes follows:-
EMI
- The company must be a trading company and carry on a qualifying trade. All trades qualifying unless they fall within excluded activities.
- Gross assets of the company cannot exceed £30 million at the date the options are granted.
- The maximum value over which an employee can hold options under an EMI scheme is £120,000.
- Employees who control 30% or more of the company’s share capital cannot participate in the scheme.
- An option has to be capable of being exercised and the shares acquired with 10 years of the date the option is granted.
No income tax arises for the employee on exercise of an option provided the option price is the market value at the date the option is granted.
The employee will only be charged to capital gains tax (CGT) when they eventually sell the shares.
CSOP
If an EMI share option scheme is not possible because not all of the conditions can be satisfied, an alternative approved share scheme would be a CSOP.
Like an EMI scheme a CSOP is flexible and share options do not have to be offered to all employees. The main conditions of this scheme are:-
- The employee is offered the opportunity to buy the shares at a specified price – which must be lower than the market value at the date the option is granted.
- Before the company can operate a CSOP it must have advance approval from HMRC.
- The participants can be full time directors and full time or part time employees – but they must not own more than 25% of the company share capital.
- The maximum value over which an employee holds options cannot exceed £30,000.
- There are no income tax or NIC charges on the exercise of an option provided this is exercised within 3 years to 10 years of the date the option was granted.
The employee will only pay CGT on any gain realised on the sale of the shares.
Unapproved Share Option Scheme
If an approved share option scheme is not appropriate an unapproved scheme may be an alternative means of offering share options. An unapproved scheme does not have the tax advantages of an EMI or CSOP scheme.
One drawback to an unapproved scheme is that the employee will suffer a tax charge when the options are exercised on the difference between the market value of the shares on exercise and the price paid for the shares. However, when the shares are sold any further increase in value will only be subject to CGT.
Employees investing in their employer company will need an exit route so that the investment can be realised at a later date. Many share schemes will be structured so the option exercise date coincides with a sale of the company.
Where shares are offered acquired and there is no foreseeable exit route, the idea of owning shares may be less attractive to an employee. An Employee Benefit Trust could be set up which could then be used as a vehicle to encourage employee share participation.
Share schemes can be complex and expert advice should always be sought before one is put in place
