Tax advantaged share scheme (such as CSOP and EMI share schemes) can be set up by certain private, public and listed companies for their employees. It is important that the position of any company looking to grant tax advantaged share options is reviewed carefully to ensure that the company meets the qualifying conditions for each scheme.
General benefit of share schemes
The way in which tax advantaged share schemes operate should result in no tax implications when the share options are granted. Granting share options will also not require a company to use any of its cash resources other than for set up costs and share valuation.
It can therefore be advantageous for a company to use share options as part of its employees' remuneration when its cash resources are limited (particularly where employees' wages would otherwise need to be decreased).
Not only do share options provide a way to retain key talent through these difficult economic times, but they also provide employees with an additional incentive to help the employer recover once economic circumstances improve, as this will increase the value of the share options held by the employees.
Particular advantages of tax advantaged share schemes
While tax advantaged share schemes (such as EMI, CSOP and SAYE share option schemes) differ significantly, at least part of their tax advantage is obtained by locking in the value of the shares over which the share options are granted at the date of grant. Any increase in the value of the shares over which the options are granted are, subject to certain conditions, only subject to capital gains tax when they are actually exercised. In the case of EMI, there is also the potential to access Entrepreneurs' Relief.
It is beneficial to grant tax advantaged share options when the value of the shares in the employer is low. This will ensure the maximum tax advantage from granting these share options especially where a company is forecasting growth and a return to profit in the short to medium term. In addition, companies can benefit from a valuable corporation tax deduction at the time of exercise of the share options.
Whilst unfortunately, the current economic circumstances have resulted in a significant decrease in share prices for private and publicly listed companies, it does make offering share options now more appealing from a tax perspective, as well as opportunities to reward staff members without the payment of cash.
Set out below is an example of the tax benefits that can be achieved through an EMI option.
EMI Option - Worked Example
If an employer:
- grants an employee EMI share option over 500 shares valued at £1 each for no cost;
- with an exercise price equal to £500 for those shares,
there should be no income tax or employee/employer national insurance contributions on the grant or exercise of the option.
If the shares are sold after the EMI share option is exercised when the shares are worth £6 each, the gain of £2,500 (£6 - £1 x 500) is then subject to capital gains tax only.
Before EMI options can be issued, in order to be comfortable with the tax treatment on exercise the shares should be valued at the time of grant. Ideally the valuation would be agreed with HMRC. In order to make granting EMI options easier in these difficult times, we understand that HMRC will approve share valuations for a period of 120 days, rather than the usual period of 90 days. This should provide some additional flexibility to businesses looking to set up EMI option schemes.
Next steps
The DWF Tax Team has significant experience in advising on and establishing a variety of employee share schemes. Please contact James Cashman or your usual DWF contact if you would like to discuss the implications of establishing a new share scheme for your employees.
