Employee Share Incentives - An Overview

Transcription

1 Employee Share Incentives - An Overview

2 Employee Share Incentives Employee share schemes are used to reward employees in a tax effective way. They can be targeted at a particular group or offered to all employees so that a company can attract and retain the best staff and encourage employees to identify with the company s goals. Legislation to prevent employees being paid bonuses and other benefits in ways that avoid income tax and NICs has largely restricted planning opportunities to Revenue approved share schemes. There is a complex code of legislation relating to employee share ownership which can affect transactions even if they are not entered into for tax planning reasons. It is therefore important that you seek advice before granting options or giving shares to your employees and directors, or altering the rights attaching to shares that they have already received. 2 Employee Share Incentives - An Overview

3 Incentives Employees can be rewarded by shares, cash bonuses or options. Phantom share schemes, which are effectively cash bonuses, are simple to administer and can be linked to specific targets for particular employees, but are not tax efficient. Tax efficient share schemes are largely limited to all employee schemes, though awards can be linked to specific targets to some extent. Their chief drawback is equity dilution and creating minority shareholdings. Share option schemes postpone the problem of equity dilution, and tend to be focused on rewarding management rather than employees generally. Listed below are some of the different ways to give an interest in the value of a company. Acquisition of Shares, including nil-paid, joint ownership and growth shares Unapproved Share Option Company Share Option Plan (CSOP) Enterprise Management Incentives (EMI) SAYE Sharesave SI Share Incentive Plan (SIP) Employee Share Ownership Plan (ESOP) Employee - Ownership Trust (EOT) Phantom Share Scheme 3 Employee Share Incentives - An Overview

4 Acquisition of Shares The simplest method of rewarding an employee is to give them shares in the company but this is not tax efficient. Either the employee has to pay market value for the shares at the time of acquisition or he will be taxed on the benefit conferred, and he may have difficulty paying for this without selling the shares. Simple and cost effective Starts the 12 month clock for CGT Entrepreneurs Relief If employee pays market value then no income tax/nic Potential corporation tax deduction if employee does not pay market value for shares If employee does not pay market value, then there will be income tax on the benefit Tax collected through PAYE/ additional NIC charge where readily convertible assets Generally either have to pay to purchase the shares or pay the tax due - may have to sell shares Minority interests: - Dilutes ownership - Share in dividends - May be difficult to sell 4 Employee Share Incentives - An Overview

5 Acquisition of Shares: Nil-Paid, Joint Ownership and Growth Shares Nil-Paid Shares There is a tension between funding the amount payable on a straight-forward acquisition of shares and the potential income tax and NI consequences. The latter are minimised if the shares are acquired at market value but this maximises the consideration which has to be given at the outset. One possible solution is to issue the shares nil or paid part. If the shares are issued nil-paid, no consideration is paid until called by the company; for example, on the sale of the company. Generally, the amount of the consideration left outstanding is treated as a notional interest free loan which can give rise to a taxable benefit in kind. However, this does not apply if, broadly, the shares are in a trading company, it is controlled by five or fewer shareholders and the individual is a full time director. It should be noted that an income tax liability will arise on an amount equal to the loan if the shares are sold before the capital is paid up and, in the unfortunate event that the company is wound up, a liquidator would call for payment of the outstanding amount. Joint Share Ownership Plan (JSOP) An alternative to the issue of nil-paid shares is the JSOP. This involves the director or employee concerned acquiring shares jointly with another person, typically an Employee Share Ownership Trust (ESOT). The individual s interest is limited to future increases in value so that the majority of the acquisition cost is funded by the ESOT. On a sale of the shares, the ESOT receives proceeds equal to the market value of the shares at the date they were acquired, plus a return to compensate for the costs of funding the acquisition, and the individual receives the balance of the proceeds. SI Employee Share Incentives - An Overview Growth Shares Growth shares also provide a means to minimise the amount payable to acquire incentive shares. A new class of share is created with rights which mean that holders have no interest in the value of the company at the date of issue. Participants therefore enjoy the benefit of future increases in value and the amount which needs to be paid for the shares is limited to the hope value of such increases. 5

6 Unapproved Share Option Non-tax advantaged Scheme Minimal, if any, initial payment by employee on grant of option No tax on grant of option, whether at market value or not CGT due on any gain made between exercise of option and sale. (Annual Exemption and Entrepreneurs Relief may be available) Complete flexibility regarding conditions or terms to include in agreement Corporation tax relief if strike price is less than market value of shares at exercise, subject to conditions being met No time limit during which option must be exercised What is a minority interest in an unquoted company worth (except on a sale/ float)? Income tax due on gain made at time of exercise of option (on difference between price paid and market value at date of exercise), accounted for under PAYE if shares are readily convertible assets Possible National Insurance on exercise of option if shares are readily convertible assets CGT Entrepreneurs Relief clock will start to run only from date option exercised Potential problems with minority interests when paying dividends or when selling/ floating company (employee will partake in dividends if option exercised) Eventual dilution of ownership Possible charge on variation, loss or release of an option if consideration is received 6 Employee Share Incentives - An Overview

7 Company Share Option Plan (CSOP) HM Revenue & Customs Approved Minimal, if any, initial payment by employee on grant of option No National Insurance on grant of an option No tax on grant of an option No tax on exercise of option if more than 3 years (or less if a good leaver ) and less than 10 years from date of grant Any gain over price paid for shares on eventual sale taxed as a Capital Gain (Annual Exemption and Entrepreneurs Relief may be available) Limited to 30,000 market value of shares at time of grant per employee. Must be granted for market value payable on exercise of option Generally, must wait a minimum of 3 years to obtain tax reliefs CGT Entrepreneurs Relief clock will start to run only from date option exercised Potential problems with minority interests when paying dividends or when selling/ floating company (employee will partake in dividends if option exercised) What is a minority interest in an unquoted company worth (except on a sale/ float)? Performance, timing and other criteria SI can be applied to restrict timing of vesting / exercise of option Corporation tax relief on difference between price paid by the employee and market value at exercise, subject to conditions 7 Employee Share Incentives - An Overview Eventual dilution of ownership Limited to full time directors (who must work at least 25 hours per week) or any non-director employee

8 Enterprise Management Incentives (EMI) HM Revenue & Customs Approved No tax or NIC on grant of option No Income Tax or NIC on exercise of option if exercise price is no less than market value on date of grant Any gain over price paid for shares on eventual sale taxed as a Capital Gain (Annual Exemption may be available) Limited to 3 million worth of options at any one time per company Limited to 250,000 market value of options at time of grant per employee (also must not own more than 30% of company) Employee must work for at least 25 hours per week for the company (or 75% of working time, if less) Entrepreneurs Relief is generally available provided the option was granted at least a year prior to the disposal; it is not necessary to hold 5% of the voting share capital Performance, timing and other criteria can be applied to restrict timing of vesting/ exercise of option Company (or Group) must not have gross assets of 30m or more, have less than 250 employees and carry on a qualifying trade. The parent company cannot be a subsidiary of, or be controlled by, another company. What is a minority interest in an unquoted company worth (except on a sale/ float)? Corporation tax relief on difference between price paid by the employee and market value at exercise, subject to conditions Eventual dilution of ownership for existing shareholders. Options must be exercised within 10 years of grant to benefit from tax relief 8 Employee Share Incentives - An Overview

9 Share Options - All Employee Schemes SAYE Sharesave - HM Revenue & Customs Approved Can acquire shares at discount of up to 20% of market value at date option granted and not pay income tax Save up to 500 per month for either 3 or 5 years and receive a tax free bonus.* These savings can then be used to fund cost of acquiring shares Can encash savings (free of tax) if don t want to take up options SAYE shares can be transferred, within 90 days of acquisition, into an ISA (subject to normal subscription limits) and subsequently sold tax free Must pay for shares CGT Entrepreneurs Relief clock will start to run only from date option exercised Potential problems with minority interests when paying dividends or when selling/ floating company (employee will partake in dividends if exercises option) What is a minority interest in an unquoted company worth (except on a sale/ float)? *The rate of bonus varies dependent upon general interest rates and has been nil since December SI 9 Employee Share Incentives - An Overview

10 Share Ownership Share Incentive Plans ( SIPs ) - HM Revenue & Customs Approved Up to 3,600 of free shares per year can be given to each employee Employees can also purchase up to 1,800 (from pre tax/ NIC money) worth of partnership shares Up to 3,600 of free matching shares if employee purchases partnership shares No income tax on dividends reinvested in SIP shares Must hold shares for 5 years to obtain tax free benefits Partnership shares cannot be forfeited on leaving employment If partnership shares withdrawn from scheme within 3 years, taxed on market value at that time; if within 5 years, on original value (or market value if lower) Reinvested shares cannot be forfeited on leaving employment No up front Income Tax or NIC If shares retained in the plan, no income tax or NIC when shares sold; otherwise CGT on increase in value after shares taken out of SIP If free or matching shares held for 3 years, only subject to income tax/ NIC on initial value of shares, not on any subsequent uplift Free or matching shares can be forfeited if employee leaves within up to 3 years Shares acquired under a SIP SIP can can be be transferred, within days days of of acquisition, into an into ISA an (up ISA to (up normal to normal subscription subscription limits) limits) and then and then subsequently subsequently sold tax sold free. tax free. 10 Employee Share Incentives - An Overview

11 Employee Share Ownership Plan (ESOP) Non-approved scheme This is a Discretionary Trust which can act as a warehouse for shares in company Can acquire shares either from other shareholders or by subscription from company; potential capital gains and inheritance tax reliefs available to tranferor. Thereafter shares made available to employees directly or via share options Employees not taxed until shares allocated or distributed to them Complete flexibility on who receives benefit May need to use an Offshore Trust to avoid possible double tax charge, once on sale of shares in Trust and then on individuals when distributed, although certain reliefs are available to mitigate the double charge Income tax payable on allocation. Income tax and National Insurance contributions accounted for under PAYE if shares are readily convertible assets No deduction for employer payments to trust until shares allocated to specific employees Taxable on individual at 20% / 40% / 45% Can be used to create a market for shares, which may otherwise be hard to sell. This can be seen as giving additional value to share awards SI 11 Employee Share Incentives - An Overview Immediate dilution of ownership

12 Employee - Ownership Trust (EOT) An EOT provides indirect ownership through a trust: employees are benficiaries of a discretionary trust which owns shares in their employing company. The best known example is the John Lewis Partnership. To qualify as an EOT for tax purposes: the company must be a trading company or the parent company of a trading group the trust must operate for the benefit of all employees, other than certain excluded participators the trust must have a a controlling interest in the company Where an individual transfers shares to a qualifying EOT in the year in which the EOT acquires a controlling interest in the company concerned, no capital gain arses (regardless of the actual consideration) on the shares transferred. Relief from potential inheritance tax consequences is also available. Provided that all employees participate on equal terms, bonus payments of up to 3,600 per employee in a tax year are exempt from income tax. Phantom Share Scheme An employee is given a cash bonus based on the increase in the value of a notional shareholding but does not actually hold any shares/options. SI No dilution of company ownership Payment is tax deductible in Company Employee has contractual right if scheme is set out in writing 12 Employee Share Incentives - An Overview Taxable on individual at 20% / 40% / 45% National Insurance payable by both company and employee Can also affect value of company on disposal due to requirement to pay the bonus

13 How we can help We have extensive experience in helping our clients to successfully implement tax efficient employee share incentives. We will work with you to develop the right solution for your company, draft the necessary paperwork and make the required filings with HMRC. About the firm HW Fisher & Company is a commercially astute organisation with a personal, partnerled service aimed at entrepreneurial small and medium-sized enterprises, large corporates and high-net worth individuals. Our tax team includes eight partners and more than 45 staff specialising in both corporate and personal tax. Our corporate tax services include tax planning, corporation tax advice, share valuations, and advising on corporate transactions including mergers and acquisitions. The tax partners and staff are practical, hands-on practitioners, and are experienced in negotiations with HMRC at the highest level. We also provide personal tax advice for a great many clients on a wide range of issues including capital gains tax planning, inheritance tax planning and flexible remuneration schemes. The wider firm is a multi-faceted group with specialist companies active in corporate finance, financial services, property, and mergers and acquisitions. For more information, please contact: SI Brian Lindsey T E blindsey@hwfisher.co.uk 13 Employee Share Incentives - An Overview Toby Ryland T E tryland@hwfisher.co.uk Andrew Jones T E akjones@hwfisher.co.uk

14 HW Fisher & Company Business advisers A medium-sized firm of chartered accountants based in London and Watford. Related companies and specialist divisions: Fisher Corporate Plc Corporate finance and business strategy FisherE@se Limited Online accounting and back-office services Fisher Forensic Litigation support, forensic accounting, licensing and royalty auditing FIAC (Fisher IT Asset Consulting) Limited Software and Hardware Asset Management, contract and supplier review, licence and audit defence Fisher Partners Business recovery, reconstruction and insolvency services HW Fisher & Company Limited Advisers to small businesses and start-ups CBF Wealth Management Limited Intelligent wealth management and financial services VAT Assist Limited UK VAT representative London office Acre House William Road London NW1 3ER United Kingdom T +44 (0) E advice@hwfisher.co.uk Watford office Acre House 3-5 Hyde Road Watford WD17 4WP United Kingdom T +44 (0) HW Fisher & Company and HW Fisher & Company Limited are registered to carry out audit work in the UK and in Ireland. A list of the names of the partners of HW Fisher & Company is open to inspection at our offices. HW Fisher & Company is licensed by the Institute of Chartered Accountants in England & Wales to carry out the reserved legal activity of non-contentious probate in England and Wales. Fisher Forensic, Fisher Okkersen, Fisher Partners, Fisher Performance Improvement, Fisher IT Asset Consulting, FIAC and Kingfisher Collections are trading names of specialist divisions of HW Fisher & Company, Chartered Accountants. HW Fisher & Company Limited, Fisher Corporate Plc, FisherE@se Limited, Fisher Forensic Limited, VAT Assist Limited, CBF Wealth Management Limited, Four Elements Consulting LLP and Fisher IT Asset Consulting Limited, are related entities of HW Fisher & Company, Chartered Accountants. HW Fisher & Company and HW Fisher & Company Limited are not authorised under the Financial Services and Markets Act 2000 but are regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. They can provide these investment services only if they are an incidental part of the professional services they have been engaged to provide. Fisher Corporate Plc is authorised and regulated by the Financial Conduct Authority under reference CBF Wealth Management Limited is an Appointed Representative of Close Brothers Asset Management Limited authorised and regulated by the Financial Conduct Authority under reference This guide has been produced with the intention of providing general information. It is a summary of the tax legislation and practice as at August The information is given for guidance only and is not a substitute for personalised, professional advice. All liability is excluded for loss or damages that arise as a result of any person acting or refraining to act in reliance upon any information appearing in this guide. HW Fisher & Company 2017 Print date: August All rights reserved.