Employee Share Schemes

Employees increasingly seek ownership involvement in the business employing them and corporate employers are able to offer share options to their employees. Share options can take many forms but are split mainly into two separate kinds:

1.  Inland Revenue approved share options offer tax and national insurance advantages but can be restrictive in their permitted terms and have limits to the value of shares each employee can hold under option. 

2.  Share options without Inland Revenue approval generate an income tax (and possibly national insurance) liability on the profit arising on exercise but have no restrictions as to form and no limit on the value of options held by each employee.  A very advantageous form of Inland Revenue approved share option is the Enterprise Management Incentive. This has the least restrictions of all Inland Revenue approved share options and has proved very popular. The total value of shares that can be held under a company’s Enterprise Management Incentive is £3,000,000, shared among an unlimited number of employees. The only restriction on value is that no single employee can hold an option over shares with a value of more than £100,000 (measured at the date of grant).

PRIVATE COMPANIES

A problem with private companies offering share options to employees is the lack of a market in which employee shareholders can trade their shares. One answer is for the employing company to create an Employee Benefit Trust for the benefit of their employees. The trustees of the Employee Benefit Trust can buy shares from the company to meet the exercise of employees’ share options and also buy company shares from employees who wish to sell.

If structured correctly, the company should obtain a corporation tax relief for the value of shares issued on the exercise of share options, approved or unapproved by the Inland Revenue, when the options are exercised.

The commercial tax team frequently advises clients on all forms of share incentives and share option schemes.