Incentivisation is the key option
For many employers there are key employees who they don’t want to lose. They are integral to the growth and success of the business. It is important to keep these employees tight to the trading company.
One option is to go down the Government approved Enterprise Management Incentive Scheme (EMI) route, which enables the employer to incentivise those key employees by granting them the option to acquire shares in the company, at a later date, for a price set at the time of the grant.
Protection can be put in place as the employer can put restrictions on the share options which might be linked to performance or if the employee leaves or voting rights.
The employee is incentivised to help grow the value within the business as they could benefit from:
a) in increase in the value of their own shares from the date the share options were granted.
b) Significant tax breaks along the way and at the time when the shares are subsequently sold. The tax breaks for the employee could be:
► No tax and national insurance liability on the value of the shares at the time the option was granted nor when the employee decides to exercise their right to acquire the shares.
► Upon selling the shares, assuming the share options were held for at least 2 years or more, the capital gains tax rate applicable to the gain may only be 10% as opposed to possibly as high as 20%. For example:
► Jamie’s employer grants him the option to acquire 5000 shares in the company pre the sale of the company 5 years further down the line.
► The grant option price is £7 per share, which is the true market value as at that date. There are no tax consequences for Jamie at this point in time.
► 5 years later, just prior to the sale of the company, Jamie exercises the right to buy the shares. The market value at that date is £50 per share. Jamie pays only the grant price of £35,000 as opposed to the market value price at the date of exercise of £250,000. Again there are no tax consequences for Jamie.
► The company could also obtain a corporation tax deduction of £215,000, the difference between the grant and exercise price.
► Jamie sells those shares for £250,000 3 days later. His capital gain would be £215,000. After taking account of the capital gains tax annual exemption for that year, he might only pay capital gains tax at 10% as opposed to 20%.
The company and the key employee have to qualify to be able to offer an EMI. The conditions are:
a) It has to be an independent trading company. Certain trades such as farming, property development, legal and accountancy services, hotels and care homes, for example, are excluded.
b) The gross assets of the company must not exceed £30 million at the time of the grant.
c) The company must have fewer than 250 full-time equivalent employees.
d) The share options themselves must be over ordinary shares that are fully paid and are not redeemable.
e) The maximum value of share options an employee can hold is £250,000.
f) The total share option value for the company must not exceed £3 million.
g) The options must be capable of being exercised within 10 years of the grant.
h) The employee must spend 25 hours a week working for the company or, if they fail to meet that criteria, they must devote 75% of their working time to the company.
i) Employees who have a material interest of more than 30% of the share capital before the options are granted are excluded from participation. This takes into account associates such as a spouse, civil partner, parents, grandparents, child or grandchild. However it does not include brothers and sisters.
We can help you by ensuring that you’re aware of the changes that will affect you, your family and your business. To find out more about the ways that we can help you, do not hesitate to contact us.