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Employee Shares and Share Option Incentives

With the triggering of Article 50, Brexit is a reality. What comes next? Many SME businesses face uncertainty as to what Brexit will mean; some are very concerned about the future of their business, while others envisage great opportunities and growth potential. SME business owners may agree that their key people will be vital in making the most of out of Brexit, whatever the respective levels of optimism.

What are some of the current shares and share option incentives that will help retain key people and keep them focussed?

Share option incentives

Enterprise Management Incentive (EMI) scheme: The most tax advantageous share option scheme. Capital Gains Tax (CGT) rules should apply with the potential for the employee to qualify for Entrepreneurs Relief (ER) – the 10% CGT rate – on a future sale of shares.

Unapproved share option scheme: Not tax efficient. However, it may be the only choice where the SME business owner does not want to issue shares and prefers share options, but the conditions are not met for the more favourable EMI scheme. Income Tax and NIC charges would apply based on market value at the date of exercise. The top rate of Income Tax is 45% compared to potentially 10% with EMI, so the tax advantage of the EMI scheme over the unapproved share option scheme can be hugely significant.

Shares

Growth share plan: This is an issue of a new class of share in a SME company designed to meet specific circumstances. It allows the key person to acquire shares at minimal cost but to participate only in the future growth in the company. Shares may be forfeited should the key person leave the company. CGT rules apply with the potential for ER on a future sale of the shares.

Nil paid / partly paid share plan: This is an issue of a new class of share in a SME designed to meet specific circumstances. It allows the key person to subscribe for new shares at their market value but where the purchase price is paid at a later date (eg: this may typically be at the time of a future exit). Part payment for shares may be made upfront (the business owners may prefer to see the key person put in some ‘hurt money’ with the balance being paid on unspecified future dates. CGT rules should apply with the potential for the employee to qualify for ER.

In most instances, not one situation is the same, and therefore seeking advice from your specialist tax advisor is always recommended.