Rewarding and incentivising key employees is crucial to the success of any business. In addition to the payment of salaries and bonuses, business owners should consider the benefits of rewarding key employees with share incentives. These are usually given by either an outright award of shares to an employee or the granting of options to acquire shares at a future time, often dependent on company and/or individual performance.
Below is an illustration of how a share option scheme typically works:
| Tom is a sales director and in Jan 2013 he was granted EMI share options by his employer which stated that if he met certain sales targets, he could acquire 1,000 shares in the company for £10 per share. £10 was the market value of the shares in Jan 2013. In June 2016, an offer has been made to acquire all shares in the company for £100 per share. Tom has met his sales targets and so can exercise the option to acquire the 1,000 shares and then immediately sell them making a profit of £90 per share in doing so, being £90,000 in total. Tom meets the criteria which allows him to claim Entrepreneurs’ Relief (ER) so the £90,000 profit is subject to Capital Gains Tax at a rate of just 10% - a much lower rate of tax than he would pay on a cash bonus. |
Some share option schemes are HMRC approved whilst others are not. The main difference being that approved schemes tend to be more tax advantageous than unapproved schemes which remain perfectly acceptable. Once an individual has a shareholding, tax reliefs such as ER can result in profits resulting from the sale of certain shareholdings being taxed at just 10% and new shareholders can start to receive dividends which tend to be more tax efficient than receiving salaries. In the above example, if Tom’s options were not EMI options then the £90,000 would be taxable at income tax rates of up to 45%.
Please note that where an individual receives shares at a discount in their employing company, income tax charges normally arise on the discount so advice is required to ensure that the value of shares is considered properly. Share values may be lower now than in future as businesses enjoy the economic recovery so now may be a good time to issue share incentives.
Business owners often resist dilution of their shareholdings, but key employees can enhance the value of the business for all parties and share incentives allow them to share in the value of growth generated by their work. Business owners need to consider whether they will be better off holding a smaller percentage in a business that is worth more as a result of a highly motivated team of key staff. It is sometimes possible to structure share incentives to ring-fence existing shareholder value for current shareholders and allow new shareholders only to share in any future growth in shareholder value.
We can offer all kinds of advice regarding share incentives, employee retention and reward generally and are happy to discuss what kind of rewards would suit your business and key employees. Business owners who have never properly explored the benefits of share incentives for their business may wish to do so to ensure that they are not missing out. For assistance with any of the above or other tax issues, please get in touch to speak to one of our specialists.
Scott Burkinshaw
Scott is Tax Partner at Shorts, specialising in providing strategic corporate and personal tax advice.
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