Share Schemes: What are the options? February 2016

Transcription

1 Share Schemes: What are the options? February 2016

2 Why, when & what? The forms of employee share schemes & employee ownership James Keith Senior Associate Share Schemes & Incentives

3 Share Schemes: What are they? Share options Share purchase Share awards Subject to conditions? No need to give up control

4 Why use them? Traditionally: Recruitment Reward Intrinsic v Extrinsic Retention Increasingly, also to: Create and fund a market Facilitate investment

5 Types of arrangement Looking at: Share Incentive Plans Enterprise Management Incentives Unapproved options Growth Shares Employee Shareholder Status Employee Benefit Trusts/Employee Ownership Trusts

6 Share Incentive Plan Free shares: Up to 3,600 p.a. Partnership shares: Up to 1,800 p.a. or 10% of salary (if less) Matching shares: 2 x Partnership Shares Dividend shares: No longer (with effect from 6 April 2013) any statutory limits on the amount of dividends that can be reinvested, although companies can impose their own limits

7 Share Incentive Plan Independent companies All employees Most tax efficient HMRC-approved Shares held in trust Eligibility period up to 18 months

8 Enterprise Management Incentives Options Up to 250,000 per employee (incl. value of CSOP shares) All or selected employees: 25 hours or more per week; or 75% of working time (if less) Exercisable within 10 years

9 Enterprise Management Incentives Not HMRC-approved but must notify Independent trading companies Qualifying trade in the UK Gross assets 30m < 250 employees

10 Enterprise Management Incentives Grant: no income tax or NICs Exercise: no income tax or NICs (unless discounted / value at grant) Sale: capital gains tax entrepreneurs relief Corporation tax relief on cost of granting shares

11 Unapproved Not HMRC-approved No restrictions on: Granter Recipient Conditions Income Tax and NICs on gains Corporation tax relief

12 Growth Shares New class of share Restricted voting and capital rights until predetermined growth hurdle achieved Existing shareholder value protected Dilution occurs once growth target met Pay full market value (value likely to be low as requires growth performance) Capital Gains rather than Income Tax

13 Employee Shareholder Status Giving up Employment Rights for Shares Tax Advantaged between 2,000 and 50,000 worth of shares in return for agreement First 2,000 exempt from tax and NI Gain on sale exempt from CGT Not for everyone (i.e. low paid workers) but

14 Employee Shareholder Status Senior management MBOs deals and Private Equity involvement High Growth and Incentives

15 Employee Ownership Employee ownership means a significant and meaningful stake in a business for all its employees. If this is achieved then a company has employee ownership: it has employee owners. (Nuttall, 2012) John Lewis most famous example

16 Employee Ownership Structures Owners Shareholders Company Limited Employees

17 Owners and Managers Direct Employee Ownership: Personal holding ESS Company Limited Growth Shares EMI Option

18 Owners and Managers (2) Shareholders Company Limited Employees

19 All Employee Ownership Employee trustees Employee Benefit Trust Hybrid Reducing to <5% shareholding Company Limited Increasing to up to 100% shareholding Indirect Employee beneficiaries Shareholders and employees

20 Employee Benefit Trusts Warehouse for shares Market for shares Employee-owned Direct / indirect employee ownership Use of multiple EBTs Employees know the business Employees have an interest in: Business success Business sustainability

21 Employee Ownership Trust (EOT) Tax advantaged type of EBT New tax exemptions to encourage employee trust ownership Employee buy outs and succession Unlimited exemption from CGT rather than an effective rate of 10% after entrepreneurs relief Tax free bonus up to 3,600 per employee per tax year if dividend waived No external shareholders receiving dividends. Staff with an economic stake through bonuses

22 The Social Enterprise/Third Sector Public Sector spin outs transfer of function Social Enterprise social and/or environmental purpose surpluses or profits which are reinvested towards achieving their social mission assets are often locked for community purpose

23 The Social Enterprise/Third Sector Community Interest Companies (CICs) Asset Lock Maximum aggregate dividend cap. This ensures that 65% of the CICs profits are reinvested back into the company or used for the community it was set up to serve

24 Summary Wide choice Used to: Create and foster motivated and engaged employees Reward key employees / all employees Recruit employees that the business needs Create a market for the business All in a cash and tax-efficient way

25 Employee share ownership: Being tax efficient Ainsley MacLaren Partner Share Schemes & Incentives

26 The Basic Position Anything given to an employee in money or money s worth as a consequence of their employment is subject to tax HMRC have probably already thought of it The Employment Related Securities regime

27 The Holy Grail Tax free awards of shares Capital rather than income on disposal 28% v. 40%/45% Possibility of entrepreneur s relief

28 Gift of Shares to an Employee

29 Issues with Gifts Income tax and CGT charge at time of gift No money to pay it Income tax charge at time of disposal But I thought it would be a capital gain! Capital gains tax at time of disposal Why don t I get entrepreneur s relief? What if there never is a disposal??

30 Enterprise Management Incentive A share option: over fully paid, non-redeemable shares granted by independent company to an eligible employee Company has less than 250 employees assets of less than 30m Employee receives: options over less than 250,000 of shares

31 Enterprise Management Incentive Exercise at Market Value on Grant Date Grant Exercise Disposal Capital Uplift Exercise Price

32 Enterprise Management Incentive Exercise at a Discount to Market Value Grant Exercise Disposal Capital Uplift Income Market Value Exercise price

33 The Gift of Shares Grant Disposal Capital Income Uplift

34 Enterprise Management Incentive Exercise at Market Value Grant Exercise Disposal Capital Uplift Exercise price

35 Unapproved Option Option to acquire at a future date No tax advantages all Income Tax Exercise is generally at market value Used where other solutions not possible Aware of the tax consequences

36 Employee Shareholder Status Employee: receives at least 2,000 of shares in return for giving up employee rights must not give any other consideration for the shares Must not hold a material interest in the company First 2,000 of shares is income tax free Any gain on the disposal of the first 50,000 of shares is exempt from capital gains tax

37 Employee Shareholder Status Capital Tax Free on disposal Income Tax Free on issue K issued Disposal > 2K Issued Disposal

38 Employee Shareholder Status Problems and Opportunities Giving up employment rights Are the shares worth 2,000? Material interest Potential dry tax charge Growth shares opportunities

39 All Employee Ownership Employee trustees Employee Benefit Trust Reducing to <5% shareholding Company Limited Increasing to up to 100% shareholding Employee beneficiaries Shareholders and employees

40 Employee Ownership Trusts Complete exemption from CGT for shares sold to an employee ownership trust if the EOT will control the company Company effectively funds the controlling shareholders exit Potential for tax free annual bonus of 3,600 to employee shareholders

41 And don t forget.. Employment related securities Corporation tax deductions PAYE issues if shares are readily convertible assets

42 Incentivising without losing control Exit & succession using employee ownership Martyn Shaw Partner Share Schemes & Incentives

43 Some basics

44 Employee Ownership Structures Direct Employee Ownership Personal employee shareholding Indirect All held by Trust Hybrid Mixture

45 Incentivising without losing control

46 Out of control? What is control? <50% <75% <95% What would work for you? What would work for your employees? What would work for key employees? Concerns? Are they valid?

47 Having the tools and using them EO flexibility Sense of involvement in the business Having a voice and feeling heard Do you need EO for that?

48 Direct 1 Limited employees Gift/Sale Existing Shareholders Employee Employer or Parent company Taxed as income / NICs Why? Why not cash?

49 Direct 2 Limited Employees ESS Existing Shareholders Employee, under Employee Shareholder Status Employer or Parent company Employment contract Min. 2,000 worth No Income Tax or NICs on 2,000 Give up various employment rights

50 Direct 3 Limited employees EMI Existing Shareholders Employee, under Enterprise Management Incentive TopCo only Assets under 30m Option not immediate ownership Performance conditions? / Exit? Up to 250,000 Very tax advantaged

51 Indirect 1 All employees EOT Existing Shareholders Employee Ownership Trust All employees of Company/Group to be eligible All eligible employees to benefit on same terms Bonus of up to 3,600 Income Tax-free / NICs payable Warehouse for shares / Separate EBT Sale or Gift? Funding? 51% and CGT relief Why? Target key employees instead?

52 Indirect 2 All employees SIP Existing Shareholders Share Incentive Plan All employees / Indirect / Special terms Up to 9,000 p.a. Income Tax and NIC-free after 5 years Reinvest dividends EOT and/or EBT alongside Sale or Gift? Funding? Why? Target key employees instead?

53 Exit and Succession using Employee Ownership

54 Exit & Succession What and Why? Not a trade sale Can include family Why do it? Customer, Supplier and Bank views Have a plan

55 Potential benefits COMPANY Profitability Productivity Employment growth Share price Resilience EMPLOYEES Localism / Job retention Poverty reduction Sharing in profitability Increased engagement Enhanced wellbeing

56 Exit & Succession EOT Existing Shareholders Employee Ownership Trust All employees and Indirect Sale or Gift? Funding? Deferred consideration? 51% and CGT relief Ongoing involvement of former owner?

57 Exit & Succession SIP Existing Shareholders Share Incentive Plan All employees and Indirect Sale or Gift? Funding? Deferred consideration? Ongoing involvement of former owner?

58 Exit & Succession Hybrid Existing Shareholders Individual Shareholders Share Incentive Plan Employee Trust All employees but Direct and Indirect Funding of indirect? Deferred consideration? Ongoing involvement of former owner?

59 Exit/Succession & EO making it work Buying into it Preparation and laying the groundwork Succession training/mentoring Key employees in the meantime: Share awards? ESS? EMI? Going forwards special terms? Communication

60 Keeping it simple Bamboozling? It needn t be Flexible? Definitely Find your fit Working together

61 MacRoberts LLP 2016