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Share Option Schemes2024-01-31T12:57:38+00:00

Share Option Schemes

Our Share Option experts can help you retain, motivate or attract key staff to help your business reach its objectives.

Share Option Schemes

Many businesses will look to shares as a way to retain, attract and motivate their key staff and to ensure staff are aligned with their business objectives. However, every business is different in terms of its size, objectives and characteristics and there are plenty of different share incentive schemes to consider. Each share scheme has many pros and cons to consider dependent on circumstances, so professional advice should be sought before implementing these, but we provide a general overview of the options below:

We’re starting with one of the most popular long-term incentive plans, which is the Enterprise Management Incentive (EMI) scheme. The EMI scheme is a way to offer tax-effective incentives to employees and it’s effectively an option to acquire shares in the company at a future date for a specified price. At the time the option is granted, employees don’t need to pay anything and they won’t actually become a shareholder until the option is exercised and they pay the exercise price. The time at which employees can exercise their shares is referred to as an exit event and the chosen exit events can vary from the business being sold to time-based exit events.

Restrictions apply around the size and trade of the company that can implement an EMI scheme.

The CSOP plan is popular for businesses that do not meet the requirements to implement an EMI scheme, as there are no restrictions on the company size or the trade of the business. However, a CSOP has its own restrictions around options being granted at market value, the limit on the value of options (£30,000 per individual), and the requirement to hold options for at least three years to be exempt from income tax.

Unlike other plans such as Save As You Earn (SAYE) or Share Incentive Plans (SIP), a CSOP allows you to select particular directors and employees to be offered the share options rather than all employees having the option to participate.

The Save As You Earn (SAYE) plan allows businesses to grant options to their employees to buy shares at a fixed price which can usually be exercised after a three or five year period. One of the positives of the SAYE from an employee’s perspective is that it’s risk-free, they can exercise the SAYE option at the end of the period if the market value of the shares has increased, but if not they can instead take the cash.

The plan is tax advantageous for employees as no income or NIC is charged on the grant of the SAYE option and the more favourable capital gains tax applies on any gains made on sale.

With Share Incentive Plans (SIP), all employees can be offered up to £3,600 of free shares with holding periods between three to five years before they can be withdrawn in normal circumstances. No income tax or NIC is charged on the withdrawal of the shares and provided their sold immediately after withdrawal, no capital gains tax would be charged either.

In addition to the free shares, employees can purchase partnership shares of up to £1,800 a year (or 10% of their salary if this is less) with their pre-tax salary. Employers can also provide up to two free matching shares for each partnership share, which effectively creates a discount. In total, with the free shares, the partnership shares and the matching shares, allow up to £9,000 shares as a maximum possible share entitlement per year.

Growth shares are a popular option for businesses that want to reward their employees immediately, but want to incentivise their employees in line with the growth of the company. The concept of growth shares is that they allow shares to be issued where employees only benefit from the increase in equity value.

Phantom shares are an option for businesses that don’t want to provide actual equity to employees. These phantom shares are more akin to a deferred bonus arrangement, where a payment will be made to employees in the future contingent on them still being employed and reaching certain performance targets, and often the payment will be linked to share price growth. Whilst the lack of equity makes phantom shares easier to implement, it doesn’t have the same tax benefits as some other equity or quasi-equity schemes.

For more information on the different Share Option Schemes, please download our guide:
employee

Meet our Share Scheme Experts

Dave Hailey
Dave HaileyPartner - Head of Tech & High Growth
Dave is a partner and heads up our Tech & High Growth department at The Smart Accountants. As Head of Tech, he has extensive experience in supporting tech businesses, whether they’re early-stage and pre-revenue or preparing to exit.

With over 15 years of practice experience, in addition to stints in both industry and the insolvency sector, Dave has built up significant commercial and business acumen. Dave spends time understanding his clients and the vision they have for their business, their key drivers and the challenges they face. This allows Dave to help them navigate the common pitfalls and to provide solutions to the challenges they face.

Outside of work, Dave enjoys playing golf and watching Tottenham Hotspur (although, don’t hold the latter against him!).

Alison Price
Alison PriceTax Partner
Alison Price is a Tax Partner with over 20 years of experience. She is a Fellow member (FCA) of the ICAEW and a Chartered Tax Advisor (CTA).

Alison started her career as an auditor in Surrey and later relocated to Cambridgeshire where she joined a local firm and specialised in providing tax advisory and compliance services to corporate clients, with a focus on owner-managed businesses.

In her free time, Alison enjoys outdoor activities such as hiking, climbing, and paddle-boarding.

James Price
James PricePartner
James is an Audit and Corporate Finance Partner with over 20 years experience.

James heads up the audit function for The Smart Accountants and also delivers a range of advisory services to clients including transaction support, lead advisory and valuation services to clients.

James has been awarded the ICAEW’s Advanced Diploma in Corporate Finance and its CF designation.

James also works with clients on longer term planning assignments such as positioning the business for an exit, and devising long term incentive plans for key employees. A current area of interest for James is employee ownership, both through share & share option schemes, and the utilisation of Employee Ownership Trusts.
Outside of work James is an occasional golfer and keen follower of Liverpool Football Club.

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Share Option Schemes – General FAQ’s

Unfortunately, there isn’t a one-size-fits-all approach. Whilst we find EMI schemes to be the most popular, not all companies are eligible to implement EMI schemes. Therefore, it’s important to first get professional advice based on your specific circumstances and your objectives. At The Smart Accountants, we’re happy to offer a free, no-obligation fact-find conversation to help establish the best share option vehicle to achieve your end goal. Please contact us to arrange this.

Yes, this is commonly done via an Employee Ownership Trust, see our EOT page for more details including how share options are granted and exercised.

Share Option Schemes – EMI Schemes FAQ’s

A more comprehensive overview to EMI schemes is covered within our guide here, but some of the frequently asked questions are:

Yes, in order to qualify for the scheme, your company must:

  • Be trading
  • Be independent (additional group rules apply)
  • Have fewer than 250 full-time employees
  • Have gross assets of £30m or less
  • Not be undertaking an excluded trading activity (such as banking, farming and property development)

If a company doesn’t qualify for an EMI scheme, then a Company Share Option Plan (CSOP) is a common alternative. One of the initial steps before undertaking any share option scheme is to consider what scheme is viable, as well as what scheme best meets the circumstances and objectives of the question. As well as company criteria, there are also employee criteria which we cover next.

For an employee to be eligible for EMI options, there is a working time commitment which means they need to meet at least one of two requirements:

  • They work at least 25 hours each week, known as the 25 hours requirement, or if less:
  • 75% of their working time, known as the 75% requirement.

Further to this, employees can’t have what is deemed a “material interest” in the company, which effectively means they cannot have more than 30% of the share capital prior to share options being granted, they cannot participate. Finally, it’s also worth noting that an EMI scheme isn’t an all-employee scheme and what we mean by that is that it can be offered to select key staff, rather than there being an obligation to offer the options to all staff, as can be the case with other schemes.

With EMI schemes, you are not issuing shares immediately, but instead, you are issuing share options. These share options are effectively the right to acquire shares in the company at a future date for a specified price. This means that an employee doesn’t actually have to pay anything when an option is granted, which in turn means they’re not actually a shareholder until they exercise the option and pay the exercise price. These options will usually not be exercised until an ‘exit event’ takes place, which we cover off below.

In our experience, the exercise event that we see most commonly used is a share sale, where a new owner takes over the company through the purchase of a controlling stake in shares, which then can allow employees to exercise their options. More information such as drag-along clauses is covered within our guide. However, other types of exits could include an asset sale.

EMI schemes can also use time-based or performance-based exercise events where the mechanics work the same, but the exit event is linked to time or performance. The exit event is usually linked to the company’s objectives and the rationale for wanting to implement the scheme and this is a key part of our initial conversation with anyone looking to implement a scheme. It’s important to note that as per the legislation on EMI schemes, the options would lapse after 10 years.

This is certainly one of the most common questions, as the EMI scheme is partially intended to retain key staff, so what happens if staff leave? Firstly, let’s look at employees leaving before exercising their options. In most cases, when employees leave, their right to exercise their option would lapse. However, there are circumstances around the manner in which an employee leaves, such as in the case of unfair dismissals, which may cause the lapse of the option to be overridden.

For employees leaving after they have exercised their option and become shareholders, it’s very likely that the company will want the shares to be sold back to existing shareholders or to the company itself. It’s important that these automatic transfer provisions are outlined within the company’s articles and/or shareholders’ agreement. ‘Good and ‘bad’ leaver provisions can also be contemplated as to the action to take for certain leaver situations.

Initially, when options are granted, no income tax or NIC is payable which makes this attractive to employees as there’s no upfront cost. When the shares are exercised, providing the exercise price is at least as much as the market value at the time of the options being granted, the employee is again not liable to income tax or NIC when the options are exercised.

Once the employee eventually sells these shares they’ve acquired through the EMI option, they are then likely to be liable to Capital Gains Tax at either 10% or 20% at the time of writing (2023/24). The lower rate applies if they qualify for Business Asset Disposal Relief (BADR), which can be the case where there are at least 24 months between the date of the option being granted and the share sale. Of course, this is a general overview and there are limits, conditions and exceptions when it comes to tax, so expert and tailored advice should always be sought. Tax advantages can also be lost when a disqualifying event takes place, which usually involves either the employee or the company no longer qualifying (e.g. the employee leaving or the company coming under the control of another company).

We have two potentially helpful resources here, our share option guide which includes an EMI scheme case study, but also our EMI Exit Event Employee Tax Calculator. This latter calculator helps employees see the impact a range of different exit outcome scenarios would have on their ultimate gain from the share options.

Yes, there is a maximum individual limit of £250,000, which means that an individual may not be granted more than £250,000 of these share scheme options. In addition to the individual limit, there is a maximum company limit of £3m, which means the total unexercised options cannot exceed £3m at any time.

EMI schemes are very common within tech and with high-growth companies that are going through the typical fundraising routes from seed to Series A and beyond, as it’s important to help retain the employees who are driving value throughout this journey. EMI schemes can be crucial in attracting talent for earlier-stage businesses that cannot compete on salaries with other larger and more established businesses. EMI schemes can also be common in competitive and service-based businesses such as the recruitment industry. That said, EMI schemes are used across a wide range of industries, so can be fairly sector-agnostic apart from the excluded activities.

Yes, even after the initial implementation, there are annual reporting requirements each year regardless of whether there have been any changes or not. This is a task that we regularly undertake for clients each year. If new share options are offered in subsequent years, it’s worth noting that a new valuation would be required, so it makes sense to offer these options in tranches together where possible.

The Next Steps

Each share scheme has complex pros and cons ranging from the tax implications to the provisions for good or bad staff leavers, therefore it’s crucial to get professional advice before anything is implemented.

If you’d like further information or to discuss these share option schemes, please get in touch and one of our experts will be happy to talk to you. 

Please call us on 0845 606 9632, email us at team@thesmartaccountants.co.uk or complete the contact form below.