Equity incentives are a proven way to motivate and retain employees and can be extremely tax-efficient. The plan that is best suited to your business will depend on a number of different factors, including the stage of your business cycle, whether or not you want the plan to be available to all employees and the business’ commercial objectives. Relevant factors include whether you want to encourage employee retention, reduce employment costs or increase growth.

There are several ‘tax advantaged’ plans with statutory tax benefits, including: 

EMI share scheme

EMI schemes are often introduced at an early stage of a company’s growth as a tax-efficient way to incentivise and retain key employees.

Key tax benefits of an EMI scheme include:

• No income tax or national insurance contributions on grant or, if the share options have an exercise price of no less than the value of the underlying shares on grant, at exercise
• Capital gains tax can be payable on sale of the shares, potentially at a reduced rate of 10% if ‘Business Asset Disposal Relief’ (formerly known as Entrepreneurs’ Relief) is available; and
• A corporation tax deduction on exercise based on the market value of the shares at exercise, less the exercise price

There are various conditions that the company and employee must meet to grant qualifying EMI options. In particular, companies can only benefit from this scheme if, broadly, they employ fewer than 250 full-time employees and their gross assets amount to £30 million or less. See here.

CSOP

If your business does not qualify under the EMI scheme, it is often worth considering the Company Share Option Plan (CSOP). This is another tax-advantaged share option scheme but with no limit on company size or number of employees, meaning that larger businesses can benefit.

SIP

This is a plan that must be offered to all eligible employees. A SIP allows companies to invite employees to acquire shares in their employer or employer’s parent company. The shares are held in a special type of employee benefit trust. SIPs can award shares in various ways and, where specific conditions are met, it is possible to award shares annually without creating an income tax or NIC charge. It is also possible to realise tax-free capital gains on SIP shares.

Non-tax advantaged plans

Where it is not possible to qualify for a tax-advantaged plan, it is still possible to structure a non-tax advantaged plan where profits realised by employees are chargeable to tax at capital gains tax rates (20% or 10%). We can also provide advice on the various types of non-tax advantaged plan, including growth share plans and nil-paid or partly-paid share plans.

Awards of shares, options or other securities made to employees and directors in the tax year, and other transactions in employee shares, options or securities, all need to be reported online to HMRC.

Common reportable transactions include:

• Any transactions in shares, loan notes or other securities, in particular where there has been an acquisition of shares or securities
• Any MBO transactions involving any element of management rollover (either into loan notes or shares)
• Any employee or director transaction involving share options, such as exercises
• Group restructuring, such as share for share exchanges; and
• Any activity in the year relating to HMRC-approved share schemes (EMI, CSOP, SIP, SAYE)

The online returns must be submitted to HMRC by 6 July after the relevant tax year. Even if there are no reportable events, a nil return for each of the registered schemes needs to be submitted every year.

We help you ensure that your business is up to date with compliance requirements by reviewing the plan rules of your incentive schemes and preparing or reviewing your online returns.

Unlike salary or bonuses, share plans can be implemented without an immediate cashflow cost to the employer. Companies whose cashflow may have been adversely affected may therefore consider equity-based incentives as an alternative to cash bonuses. It may also be possible to ‘sacrifice’ salary into a more tax-efficient form of equity incentive, in order to achieve both cashflow savings for the employer and tax savings for the employee.

In an increasingly globalised environment, employers of all sizes are having to consider the impact of employees travelling between jurisdictions.

Internationally-mobile employees (IMEs) include:

• UK residents going to work overseas
• Overseas residents coming to work in the UK
• UK and overseas residents who move in and out of the UK

The tax treatment of shares or options held by IMEs is a complex area. Share or share option profits realised by IMEs may be subject to tax in more than one jurisdiction and the social security position can differ from the tax position.

It will also be necessary to consider the position of IMEs under double taxation treaties. Tax treaties can protect IMEs against double taxation and allow IMEs to claim tax relief in the UK or overseas. Our expert team can help employers deal with the complex requirements of a globally-mobile workforce by assisting with payroll and social security requirements on employee shares and share options and advising on planning opportunities. We can also advise employees on any tax that they need to account for under self-assessment.

Employee ownership trusts (EOTs) can provide company shareholders with an exit strategy that does not involve an external buyer. The structure enables greater employee engagement and a succession plan that can accelerate growth and help foster an inclusive culture.

To sell to an EOT without any liability to capital gains tax, shareholders must dispose of a controlling interest of over 50% of the shares in a trading company or the ‘principal company’ of a trading group to a trust. The trust then holds the share capital of the company for the benefit of the company's employees.

Provided the qualifying conditions are met, no capital gains tax will be payable on the disposal of shares to the EOT by UK resident taxpayers. This will be of particular benefit to any owner otherwise subject to the full rate of capital gains tax, currently at 20%.

A company that is majority-owned by an EOT can pay annual, income tax-free bonus payments of up to £3,600 per employee.

The sale process should be comparatively simpler than a sale to a third-party purchaser, such as a trade buyer or a private equity fund. This process has lower transaction costs and fewer due diligence requirements, thus being faster and less costly than alternative exit strategies.

Our team provides advice on whether or not an EOT is the right structure for your business and suitable for your succession planning and growth. We also assist companies and shareholders with the implementation of a sale to an EOT.

See more.