Employee Share Incentives

Transcription

1 Employee Share Incentives

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 to all employees so that a company can attract and retain the best staff and encourage employees to identify with the company s goals. Recent legislation to prevent employees being paid bonuses or other benefits in ways that avoid income tax and NICs has largely restricted planning opportunities to Revenue approved schemes. The legislation is complex and can affect transactions that 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 alter the rights attaching to shares that they have already received. 2 Enterprise Share Incentive

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. Listed below are some of the different ways to give an interest in the value of a company. Acquisition of Shares Phantom Share Scheme Ordinary Share Option Company Share Option Plan (CSOP) Enterprise Management Incentive Scheme (EMI) Share Incentive Plan (SIP) SAYE Sharesave Employee Share Ownership Plan (ESOP) 3

4 Acquisition of Shares The simplest method of rewarding an employee would be to give them shares in the company but it 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 CT deduction if employee does not pay market value for shares (in some cases) 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 Either have to pay funds to purchase the shares or pay the tax due - may have to sell shares Minority interests: - Dilutes ownership - Share in dividend - May be difficult to sell Employee Shareholder Status The Government is to create a new employment status, to be known as the employee shareholder status. Individuals adopting this status will receive a minimum of 2,000 worth of shares. Legislation will be introduced to exempt all gains made on disposals of up to 50,000 worth of employee shareholder shares from Capital Gains Tax. In addition it is proposed that the first 2,000 of share value received by the employee shareholder will not be chargeable to income tax or national insurance. These exemptions are expected to commence on 1 September Enterprise Share Incentive

5 Phantom Share Scheme An employee is given a cash bonus based on the value of a specified holding of shares (whether under a formal agreement or otherwise) when the company is sold/ floated but does not actually hold any shares/ options. No dilution of company ownership Payment is tax deductible in Company Employee has contractual right if scheme set out in writing Taxable on individual at 20% / 40% / 45% National Insurance payable by both company and employee Can also affect price of company on disposal due to requirement to pay the bonus Share Options Individuals Options can be granted to an employee either: A) outside an HM Revenue & Customs (HMRC) approved option scheme where no set conditions apply resulting in greater flexibility; or B) under either of two HMRC approved option schemes where certain conditions apply i.e. options over shares worth a maximum of 30,000/ 250,000 at market value can be granted. 5

6 Ordinary Share Option Non-approved 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 on what conditions or terms to include in agreement CT relief if strike price is less than market value of option 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 Eventual possible 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 Enterprise Share Incentive

7 Company Share Option Plan (CSOP) HM Revenue & Customs Approved Minimal, if any, initial payment by employee on grant of option No National Insurance No tax on grant of 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 would be treated 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 options Must wait a minimum of 3 years to obtain tax reliefs CGT Entrepreneurs Relief clock will start to run only from date option exercised Eventual possible 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 can be applied to restrict timing of vesting/ exercise of option CT relief on difference between price paid by the employee and market value at exercise, subject to conditions Eventual dilution of ownership Limited to full time directors (who must work at least 25 hours per week) or any non-director employee 7

8 Enterprise Management Incentive Scheme (EMI) HM Revenue & Customs Approved No tax 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 would be treated as a Capital Gain (Annual Exemption and Entrepreneurs Relief may be available) Performance, timing and other criteria can be applied to restrict timing of vesting/ exercise of option CT relief on difference between price paid by the employee and market value at exercise, subject to conditions 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) Company must not have gross assets of 30m or more nor be a subsidiary of another company. Must also carry on a qualifying trade Currently, CGT Entrepreneurs Relief clock will only start to run from date of exercise of option, unless the employee already qualifies for Entrepreneurs Relief. For shares acquired on or after 6 April 2012 and disposed of on or after 6 April 2013, the requirement to hold 5% of the voting share capital is removed and the 12 month minimum holding period will commence on the date the option was granted What is a minority interest in an unquoted company worth (except on a sale/ float)? Eventual dilution of ownership for existing shareholders. Options must be exercised within 10 years of grant to benefit from tax relief 8 Enterprise Share Incentive

9 Share Options - All Employee Schemes SAYE Sharesave - HM Revenue & Customs Approved Can acquire shares at not less than 80% of market value at date option granted and not pay Income Tax on any increase in value to date of exercise Save up to 250 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 Must pay for shares CGT Entrepreneurs Relief clock will start to run only from date option exercised Eventual possible 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)? Eventual dilution of ownership *The rate of bonus varies dependent upon general interest rates. As from August 2012 the bonus rate is Nil. 9

10 Share Ownership Share Incentive Plans ( SIPs ) - HM Revenue & Customs Approved Up to 3,000 of free shares per year can be given to each employee Employees can also purchase up to 1,500 (from pre tax/ NIC money) worth of partnership shares Up to 3,000 of free matching shares if employee purchases partnership shares Up to 1,500 of dividends can be reinvested each year 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 sell their shares otherwise CGT on increase after shares taken out 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 Shares acquired under a SIP or SAYE scheme can be transferred, within 90 days of acquisition, into an ISA (up to normal subscription limits) and then subsequently sold tax free. 10 Enterprise Share Incentive

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. Thereafter shares made available to employees directly or via share option Payments into the Trust generally allowable for tax under Tax Case law but need to structure correctly Employees not taxed until shares allocated or distribution made to them Gives 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 and National Insurance payable by both company and employee (subject to employee maximum limit) on allocation Under tax and accounting principles, no deduction for payments to trust until shares acquired are allocated to specific employees Taxable on individual at 20% / 40% / 45% Immediate dilution of ownership Trust can be used to provide other benefits rather than just shares Can be used to create a market place for shares, which may otherwise be hard to sell. This can be seen as giving additional value to share awards 11

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