Employee Share Schemes

Author:Clyde & Co LLP
Profession:Clyde & Co
  1. Introduction

    Employee share schemes are designed to encourage employees to become shareholders in their employer company. These schemes can take a variety of forms. Most involve share options but with some schemes employees are awarded actual shares. A basic distinction is between schemes with special tax advantages and those without. 'Phantom' schemes only involve cash payments but aim to replicate the effect of a share scheme.

  2. Tax Advantaged Schemes

    2.1 Enterprise management Incentives ('EMI')

    This is a highly flexible arrangement with substantial tax advantages, under which employees are granted options in the employing company:

    Participants do not suffer a charge to UK income tax or NIC on grant of an EMI option Participants do not suffer a charge to UK income tax or NIC on exercise of an EMI option within ten years of grant (so long as the exercise price is at least equal to the market value of the underlying shares at the date of grant) Participants may suffer a charge to UK capital gains tax on a subsequent disposal of shares acquired on exercise of an EMI option The employer company can decide which directors and/or employees receive EMI options (so long as they satisfy certain minimum working time requirements) and many of the terms (e.g. performance conditions) of those options Maximum value of £250,000 of shares over which options can be granted to any single participant Maximum value of £3 million of shares over which options can be granted in total by the employer Only small and medium sized companies (i.e. those with less than £30 million gross assets and fewer than 250 full-time employees) can offer EMI options The company must not be controlled by another company Non-trading companies and companies carrying out certain 'lower risk' trades (e.g. dealing in land and certain financial activities) cannot offer EMI options An employer company cannot offer both £30,000 of CSOP options (discussed below) and £250,000 worth of EMI options to a single participant. The maximum value of EMI options that can be granted is reduced by the value of CSOP options in issue (and vice versa) 2.2 Employee Shareholder Status ('ESS')

    This was another flexible scheme with substantial tax advantages. However, the government was concerned that the scheme was being abused by highly paid directors, who were not the people the scheme was intended for. Consequently, the government announced in the November 2016 Autumn Statement that the ESS...

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