Historically most of the tax advantages from share incentives were targeted at larger companies. The exception, designed for smaller companies, was the EMI (Enterprise Management Incentive) scheme.
The usefulness of EMI was drastically reduced in 2008 with the replacement of the taper relief rules by entrepreneur’s relief(ER).
More recently the ER problems have been removed and the EMI has been restored as a useful incentive scheme once more.
With an EMI scheme, the company issues options for selected employees to acquire shares at a future date based on today’s market value. When the options are exercised, profits are only liable to capital gains tax at 10% when the shares are sold rather than to income tax when the options are exercised. Clearly this provides a strong incentive for the employee to drive growth in the business.
There are certain circumstances where employers may prefer to give shares to employees at the outset – perhaps as part of a tax efficient remuneration scheme. In such cases either the employee has to find the funds to purchase the shares upfront or suffer an income tax charge if he pays less than the market value for them. However, following the introduction of the concept of the shareholder employee in the Growth and Infrastructure Act 2013, if the employee is willing to give up certain employment rights, a company can give an employee up to £2,000 of shares tax free with the first £50,000 of profit on their later sale also tax free. These rules are expected to come into force with effect from 30 September 2013.
If you would like to discuss the use of share incentive schemes in your business, please do call us.
This advice is general in nature and you should take no action without consulting your professional advisors.