When EMI options just won’t work

This week’s Tax Bite comes from Sarah Anderson who is a guest ‘Tax Biter’ from The RM2 Partnership:

EMI

For many companies thinking about granting share options to their employees, the first port of call is Enterprise Management Incentive options.  However, not all companies can use EMI.

What if:

  • your company is involved in a joint venture?
  • your company has a VC investor that could take control in certain circumstances?
  • you have more than 250 employees?
  • you want to include non-employees such as non-executive directors?

All is not lost – other tax efficient arrangements are available.

If your company doesn’t qualify, you might think about using the tax-efficient Company Share Option Plan (“CSOP”).

CSOP

CSOP doesn’t offer the same advantages as EMI – but it still means that gains are subject to capital gains tax rather than income tax and NICs, provided certain rules are met.  When compared with a non-tax advantaged plan, for example an unapproved option scheme, the CSOP creates a much more favourable position for employees.

You can grant options under CSOP to whom you want, and as many employees as you want.  Each employee can be granted options over £30,000 worth of shares every 3 years, so over a ten year period, options can be granted over £90,000 worth of shares.  Unlike EMI, there is no company limit applicable to the value of shares under option.

Recent changes to the law mean that you no longer need to seek advance approval from HM Revenue & Customs, so it’s quicker and easier to put a CSOP in place than it used to be.

ESS

An increasingly popular alternative to EMI and CSOP is the Employee Shareholder Status (“ESS”). Using ESS, selected employees can receive a one-off gift of at least £2,000 of shares completely free of income tax and NICs.  £50,000 worth of shares can be gifted under ESS – however any shares valued in excess of £2,000 will be subject to an immediate charge to income tax and NICS.

The key benefit for participants of ESS is that any future gains on the disposal of ESS shares should be completely exempt from capital gains tax. The potential for tax free gains makes this a highly appealing arrangement.  Although its longevity has recently been in the spotlight, the election result should ensure that it should remain in place for the foreseeable future.

Other Options

If you want to reward non-employees – such as non-executive directors – you could consider a Deferred Share Purchase Plan (“DSPP”).

Effectively, you award the individual shares on a deferred payment basis.  The loan remains outstanding until such time as the company decides to call on it (which might be, for example, on a business sale).  The participant has to pay a small amount of interest on the outstanding loan, but the upside is that they become shareholders immediately.  That means they can benefit from dividend payments, if there are any, and when their shares are sold the gains will be subject to capital gains tax, not income tax. (The main risk is that there can be a call on the outstanding loan, e.g. if the company is wound up.)

 

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