Share Schemes – What benefits can they bring your business?

Share Schemes – What benefits can they bring your business?

Share Schemes – What benefits can they bring your business?

Share Schemes – What benefits can they bring your business?

What is the first thing that comes to mind when you think about share schemes? Fat Cat executives from big multinationals making a fortune and not being taxed on it. Far too expensive and complicated to even begin to think about for my business.

If this is the case, then you’re probably not aware of the benefits of having a share scheme and how accessible they have become for the average business. Indeed there are tax-advantaged share schemes that have been specifically legislated so only smaller, non-multinational business qualify!

The benefits of having your own share scheme can be numerous, including:

  • Ability to recruit and retain high-value employees at the outset of a business without the additional cash outlay
  • Improved employee engagement in the business
  • Greater productivity and business performance
  • Managed succession planning on business exit
  • Company and individual tax savings

First Steps

When initially considering an employee share scheme, there are several questions that need to be considered from the outset:

  1. Who do I want to participate – everyone or just a select group of employees?
  2. Is it going to be a share purchase or share option plan?
  3. Size of the company, e.g. number of employees?

Depending on the answers and business objectives, this will provide a guide as to which employee share scheme is the right one for your business. In order to help your considerations, there is a brief outline below of the two most popular tax-advantaged schemes available today:

Share Incentive Plan (SIP)

Subject to the relevant holding criteria, the SIP is a share purchase plan where the employer is able to give a certain amount of free shares to their employees tax-free. In addition, there is also scope to include an option for the employee to purchase additional shares out of tax-free income, which then, in turn, the employer can match – again tax-free.

One of the qualifications to be eligible for a SIP is that it needs to be available to all employees, although certain conditions can be included that will help target the reward. It isn’t a requirement that everyone joins, just that they have the opportunity to do so.

If your objective is to look to recruit and retain specific key employees, then this scheme wouldn’t work. However, if you want to provide a general reward scheme to all employees, then this would be ideal.

Enterprise Management Incentive (EMI)

An EMI share plan is a share option plan, which means rather than the employee being given shares, they are given an option to purchase shares at a price set today (normally the market value at the time) on the basis of a future event occurring.

The theory is that by the time the future event has occurred, the shares would have grown in value and so are worth more. This gives the employee the opportunity to buy the shares at a lower value and then sell at the higher value almost immediately afterwards if they so wish.

Outside of an EMI share scheme, this increase in value would be subject to income tax, most likely at the higher rates of income tax. However within an EMI option scheme this gain is subject to Capital Gains Tax instead and provided the option has been held for at least 12 months, there is scope for the gain to be taxed at 10% (rather than the higher rate of 20%) under special Entrepreneur’s Relief rules.

To be able to qualify for the favourable tax treatment, then both the company and individual need to qualify:

Qualifying Company

  • Be independent (not under the control of another company)
  • Gross assets are less than £30m
  • Less than 250 employees
  • Be a trading company and not carrying on an excluded activity (e.g. banking, farming, property development, provision of legal services, shipbuilding)

Qualifying Individual

  • Be an employee of the company issuing the share options (or of its qualifying subsidiary)
  • Work at least 25 hours a week or 75% of your available working time
  • Have an existing interest in the company of less than 30%

Common objections

Often, when considering an employee share scheme, the existing owners are nervous about giving away too much control over the company they’ve carefully built up over the years.

Within both the SIP and EMI share schemes, restrictions can be put on the shares being provided to the employees, which will protect the existing business owner’s value and control in the company.

Next Steps

Both EMI and SIP are highly flexible and can be tailored made to meet each individual business’s needs, and so the information provided above only starts to scratch the surface as to what can be done.

If you’ve previously thought that share schemes weren’t for you or your business then hopefully this article has made you think again! As with all such tax planning, it is recommended that professional advice is sought if you want to take this further, as it will save a lot of time energy and money in the long run, leaving you to focus on growing your business.

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