In today’s climate, retaining employees is critical to many businesses' future growth plans. There are lots of different ways to incentivise employees in a tax efficient and commercial way, and it can pay to explore a number of different options. It is critical that whatever route is chosen the business owners own future plans and objectives are not overlooked.
Using share schemes and similar, employees will be able to directly participate in the success of the business, hence encouraging and developing a more productive and efficient workforce.
Employee share schemes can also form a tax efficient part of a company’s succession planning, allowing selected key employees to have a stake in the business.
An EMI (or Enterprise Management Incentive) scheme is a type of approved share option scheme and is one of the most popular ways for companies to incentivise employees. EMIs can work very well; but as with all approved schemes, are not suitable for all companies as specific criteria apply. EMIs can often be used in conjunction with other share incentivisation options such as EOTs. Companies can sometimes set up multiple EMI schemes during their lifetime.
Other approved schemes include Company Share Option Plans (“CSOPs”), Share Incentive Plans (“SIPs”) and Save As You Earn (“SAYE”). Approved share schemes are usually afforded some form of statutory relief that makes their acquisition by employees, and award by employers, efficient from a tax perspective.
Each share scheme has specific rules and requirements set by HMRC. Employers must adhere to these regulations to ensure the schemes remain approved and employees can benefit from the associated tax advantages.
Awarding growth shares to employees under a growth share scheme can be an excellent way to incentivise those employees to work alongside the management team to support the future growth of a company. Those employees awarded growth shares will be able to share in the success of the company financially and in a way which is tax efficient as there is no tax to pay when shares are awarded and it is only if the shares increase in value that CGT may become payable. Growth shares can also be an excellent tool for IHT planning; and we regularly advise clients on growth share schemes.
An EOT has many features of other similar share schemes in that it can be used to incentivise employees, but is also an excellent tool for succession and exit planning. An EOT has many tax advantages and the selling shareholders can often benefit from a full CGT exemption on sale of the shares to the trust provided certain conditions are met. There are also significant IHT and income tax advantages. EOTS can be used in conjunction with an EMI scheme to provide added benefit and flexibility, and we have experience of both options.
Sole director/shareholder wanted to retire but did not want to do a trade sale.
The sole director’s children had no interest in taking over the business.
In the circumstances, we suggested that the company establish an EOT so that he could sell his shares to the trust. The surplus cash in the company could be used to finance part of the share sale with further payments to be made funded from the company’s profits.
By implementing the scheme correctly and ensuring the transactions met the qualifying criteria, it meant that there was no capital gains tax on the sale of the shares to the trust. Once the shares have been paid in full the employees own the company and can benefit from the profits made. Employees can also receive up to ÂŁ3,600 as a tax free bonus (but national insurance is still payable).
The company was growing quickly and profits were increasing year on year. To incentivise employees the management wanted to put in place a share scheme.
The management wanted the up-front cost to be as low as possible. Unfortunately advance assurance from HMRC was not available.
We suggested issuing various classes of growth shares to the employees at nominal value. These shares only had value once a certain hurdle rate had been reached in the future which meant that on issue the shares only had par value.
The employees were able to sell shares once significantly above the hurdle and achieve capital gains tax treatment(and a 20% tax rate) rather than income tax treatment under the Employment Related Securities legislation (at tax rates of up to 8.75%/33.75%).
An EOT was established three years ago. An attractive offer for the shares in the company was made. This would trigger the exercise of the EMI share options which would dilute the EOT’s share ownership.
The consideration for the shares was a mixture of cash and deferred consideration. The EOT and the shareholders agreed a different split of the overall share proceeds than would be the case by reference to the capital rights.
It was not possible to obtain any HMRC clearance so we prepared a detailed advice note around the commerciality of the arrangements should HMRC raise any queries.
As the shareholders have taken reasonable care in respect of these arrangements, should the arrangements be challenged successfully by HMRC there should be question of any penalties being charged, which in this case could have amounted to several hundred thousand pounds.
EMI schemes are designed for smaller, high-growth companies and offer more generous tax reliefs. CSOP, SIP, and SAYE are also approved schemes but have different eligibility criteria and tax benefits. We can help you choose the right share scheme based on your business objectives.
Yes. Share schemes, can play a key role in succession planning. They allow for a gradual handover of ownership to employees while offering tax advantages for the current owners.
EOTs can offer a 50% Â capital gains tax exemption to the selling shareholder(s) and provide income tax-free bonuses of up to ÂŁ3,600 per employee per year. They are also a great way to transition ownership to the next generation of the business whilst ensuring it remains independent.
Yes. Many businesses use EMI schemes to reward key individuals and EOTs for broader succession planning. We can advise on combining these schemes in a way that works for you.
