Share Option Schemes

We have the experience you will need to help you decide whether to offer share options and if so, which type of the multitude of arrangements possible is the best.

We cut down on the need for many different sets of advisers as we can handle the whole process for you from design, implementation, communication through to HMRC reporting.

Years of experience have left us attuned to the needs of employers.

Share options – benefits for employers

In the UK there is far more choice for employers in terms of the type of arrangement to pick than is on offer elsewhere in the world.

Employers have flexibility when it comes to implementation of share option awards.  Benefits for employers include:

• Flexibility – the ability to design the option rights and the terms to suit the need of the business.  Some HMRC tax-advantaged option plans have to be offered to the entire workforce but not all do.  A benefit of EMI is that the employer gets to chose who receives options, how many and how much the employee has to pay for them.
• Staff retention – this is a key consideration for high growth businesses with key staff.
• Options do not immediately impact existing shareholders – until options vest, the employee will not have shareholder rights such as the right to request access to company financial information; and
• Options do not dilute existing shareholders until exercise – , we always recommend a share capital table is prepared before the options are granted so that employers and their shareholders understand the dilution that will arise on exercise.
• Options can be “exit only” –  this means they will vest when the business is sold and the exercise of the options is usually wrapped up with the sale documentation to eliminate the risk of the option holder not consenting to the sale.

Benefits of share options for employees

There are good reasons why options rather than immediate shares are popular with employees as well as employers. These include :-

• Capital Gains Tax – an opportunity to bring profits made on the shares within the capital gains tax regime which carries a lower rate of tax than profits taxed to income.
• Income tax – avoiding an immediate charge to income tax and often national insurance on any benefit conferred upon award of the shares.  With an unapproved option there is no tax on award.
• Avoiding the risk the shares decrease in value – Risk for the employee as if the shares decrease in value HMRC does not refund the income tax or national insurance paid on award.

Approved share options

Four types of option arrangements confer special tax advantages for employers and employees if various legislative requirements are satisfied – these options are known as HMRC tax advantaged options (formerly known as HMRC approved options).

The types of tax-advantaged share options schemes are listed below. Please visit our pages on each of these types of HMRC tax-advantaged share options.

• Enterprise Management Incentive (EMI)
• Company Share Option Plan (CSOP)
• Share Incentive Plan (SIP)
• Save as you Earn (SAYE)

EMI Share Options are the most popular

When we are dealing with private companies the starting point will always be EMI share options.  Of all the option arrangements possible in the UK EMI outshines on many fronts and is particularly tax effective.   In some cases EMI options cannot be awarded as the qualifying conditions are not met – in those cases we will consider alternatives which can be tailored for the business.

Unapproved share options

If you do not fit into one of the four types of HMRC tax-advantaged options you can still grant options which are known as non-tax-advantaged (formerly known as unapproved options). If you choose non-tax-advantaged share options, the fact they are not HMRC approved does not mean they are somehow unlawful or not acceptable to HMRC.

Share options on termination of employment

An advantage of options is that if employees or directors leave the business before they have exercised their options the usual position is that the option will lapse. It is possible to draft the share option documentation in such a way as to remove liability to pay compensation for loss of share option rights.

By contrast, if any type of option has been exercised and shares have been provided to the employee or director the position on leaving employment is not as straightforward. There is no automatic lapsing. The position will depend upon what is set out in the articles and/or shareholders agreement. The company may buy back shares from departing employees or directors and these can either be cancelled or recycled for future awards by either holding them in an EBT or in the company’s treasury account.

Legal advice for employees offered share options

We review share option proposals offered to employees and directors.  Our specialist expertise helps us spot the issues employees and directors need to be aware of.

Please do contact us to discuss your queries.  We are always happy to quote and provide an outline scope. We are known for being practical and cost effective.  Companies with option arrangements in place out-perform those that do not offer share incentives.