Our Employee Share Option Schemes Service
What Are Employee Share Option Schemes?
The increasing popularity of employee share option schemes is attributed to their strategic benefits, recognised by governments, directors, and shareholders.
This extensive use highlights the flexibility and potential advantages these schemes offer to businesses and employees alike.
The main reasons that share schemes are used is to:
- Attract individuals to a senior role or to retain them over a long period of time
- Motivate senior employees to increase performance and achieve greater targets
- Get more “buy in” from employees as it allows them to share in the success of the company
Share schemes can be either HMRC-approved or unapproved.
If they are approved, the individual and/or the company issuing these share options benefit from specific tax reliefs, further enhancing their ”value”.
For a scheme to be approved, the scheme terms, the company, and the employees must qualify under the relevant legislation.
Different Types of Share Schemes and Their Agreements
There are a number of types of share schemes that are commonly used, including the following:
Enterprise Management Schemes (EMI)
EMI options are by far the most popular as they can be drafted for groups of employees as part of a scheme or tailored to the requirements of an individual employee.
Being an approved scheme, the employee will, subject to satisfaction of certain conditions, benefit from relief from income tax and national insurance contributions (NICs) on the receipt of the shares as well as benefit from business asset disposal relief on capital gain tax on a subsequent sale of the shares. Such schemes are often used for companies aiming to attract and retain top talent.
The conditions to exercise these share options may be flexible and tailored to achieve specific company performance targets or other criteria.
Company Share Option Plan (CSOP)
CSOPs are approved schemes for larger companies giving the employee, subject to satisfaction of certain conditions, income tax and NICs relief on the receipt of the shares.
They do not need to apply to all employees and can be subject to performance criteria.
However, they can only be exercised at least 3 years after their grant in order to receive the tax benefits.
Save As You Earn Schemes (SAYE)
These are both a share option scheme as well as a savings scheme and are more popular in companies with large numbers of employees.
They apply to all (eligible) employees ,making it more complex to administer.
As an approved scheme, subject to satisfaction of certain conditions, the employee receives income tax and NICs relief.
Share Incentive Plans (SIP)
These allow employees to acquire shares as opposed to share options.
There are 4 types of share available under a SIP: free shares, partnership shares, matching shares and dividend shares.
These schemes are very flexible as the company can decide the elements it wishes to implement and the level of award.
Unapproved Schemes
Companies may issue unapproved options to maintain flexibility in rewarding employees without meeting HMRC qualifying standards. These are very flexible and are beneficial where the shares under option do not qualify under any approved schemes.
Unapproved schemes, while lacking tax benefits, can also grant significant exercise price flexibility.
Employee Benefit Trusts (EBTs)
EBTs are commonly used in larger employee share schemes such as CSOPs, SAYE schemes and SIPs where the EBT is required to acquire and hold shares in the company to provide benefits to both employees and former employees.
They can also be used to simply “warehouse” shares on behalf of the company.
Understanding the differences between these enables decisions to meet specific business and employee needs.
Conditions to Exercising Options
Share options can include a number of different types of conditions which need to be achieved before the option can be exercised.
These can be performance or event related, for example:
- Performance conditions – these can be based on financial performance of the company such as sales or profit or on an individual or team basis
- Event conditions – the most common event is a sale of the company (known as an “Exit Only Option”), but other events could be a minimum length of service
The conditions could also be a mixture of both, for example a sale of the company provided that the sale value is of a minimum amount.
How Our Corporate Team Can Help
We have assisted companies in preparing all types of employee share option plans, including:
- EMI options: individual plans and schemes with individual awards – exit only, performance / time based and combinations
- We regularly work with companies in conjunction with tax advisors / accountants in assessing the options available and setting up suitable schemes, complying with HMRC requirements and ensuring they meet the legal and tax objectives
- A well-crafted agreement can provide substantial future tax advantages for the company and employees
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David Hibbert, Stax Trade Centres PLC
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Mr. Roberts, Communications Plus Ltd.
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Mike Forsyth - Founder and Chairman, Safer Sphere
Myerson Solicitors acted for us in a complicated Management Buy-Out transaction. Akeel, Palma, Simon, Andrew, and the team supported completion in a tight time frame with the utmost professionalism and diligence. They coordinated and cooperated seamlessly with the wider advisors and stakeholders, ensuring full protection and compliance with the transaction. We have worked with Myerson on a number of legal aspects for over 5 years, and would highly recommend their services.
Colin
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Legal 500, 2024
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Legal 500, 2024
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Legal 500, 2024
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