Spring 2014 Newsletter
Share Ownership for Employees
The encouragement of share ownership for employees is high on the agenda of the current Government and a number of changes to current rules have been or will be made. Probably the most important development for small and medium sized enterprises is a change in the Enterprise Management Incentives (EMI) scheme.
EMI allows selected employees (often key to the employer) to be given the opportunity to acquire shares in their employer through the issue of options.
If shares or 'unapproved' options are given to an employee, a tax bill will arise on the employee often before the shares can be sold by the employee.
EMI allows options to be granted to employees which allow the shares to be received without any tax bill arising until the shares are sold.
How does it work?
Selected employees are granted options over shares of the company. Under the option the employee is given the right but not the obligation to buy shares at a later date. Typically the purchase price of the shares will be set at the market value of a minority shareholding in the company at the date the option is granted.
There will be no tax for the employee to pay when the option is exercised (or granted) so long as the amount payable for the shares under the option is the market value of the shares when the option is granted.
Following the acquisition of the shares, when the option is exercised, an employee may immediately dispose of, or may retain the shares for a period before selling them. At such time there will be a chargeable gain on the difference between the sale proceeds and the amount paid by the employee for the shares.
Chargeable gains, if they exceed the annual exemption are normally chargeable at 18% or 28%.
However, Entrepreneurs' Relief (ER) when available can reduce the CGT liability to 10% and this is where the recent change to the law has increased the attractiveness of EMI. ER normally requires the shareholder to:
- have held shares in the qualifying trading company for at least 12 months prior to sale and
- own 5% of the ordinary voting shares of the company.
The law has been amended to extend the relief to EMI shares by allowing the 12 month minimum holding requirement to commence on the date the option is granted and removing the 5% minimum shareholding requirement.
So, EMI provides an opportunity to participate in the future capital growth of the company while deferring any cash costs of buying shares until a later date and with a 10% tax bill on the net gain which only arises when the shares are sold.
What are the benefits to employers?
- Employees have a potential stake in their company and therefore retention and motivation of these employees will be enhanced.
- Options will not directly cost the employer any money in comparison to paying extra salary.
- There will normally be no National Insurance contribution (NIC) charges for the employer when the options are granted or exercised or when the employee sells the shares. NIC liabilities may arise in some circumstances on other options or share awards.
- A corporation tax deduction for the employer company broadly equal to employees' gains will be given when an employee exercises an option.
We can help you decide whether EMI is appropriate for your company and whether the company will qualify.