Tax advantaged executive share plans
Two statutory executive share plans carry significant tax advantages. They are sometimes called "approved" plans. They can also be used to make grants of options to all employees, not just executives.
Enterprise Management Incentive options (EMI options) are popular statutory options specifically designed by the UK government for smaller companies. They are very flexible in terms of plan design, involve little red tape (they do not require prior approval from HM Revenue & Customs) and are relatively cheap to implement.
Up to £3million of shares can be put under option with individual employees being allowed to hold unexercised options over up to up to £120,000 worth of shares.
Importantly, they carry very attractive tax advantages.
In order to qualify to grant EMI options companies must be independent and have gross assets of less than £30 million and not more than 250 employees group-wide.
- No income tax or national insurance contributions payable on exercise of the option in respect of any increase in value of the shares above the market value of the shares when the option was granted
- Capital gains tax treatment arises on the sale of the shares acquired
- Corporation tax deduction is available for the employing company equal to the gain on exercise of the options (that is, the difference between the exercise price and the value of the shares when the options are exercised)
The key to get the most value from EMI options is to identify controls on their grant and exercise appropriate to the particular company.
For our full written guide to EMI options, qualification criteria, and the associated tax advantages they offer, please contact us.
Company Share Option Plan or "CSOP"
Not all companies can meet the gross assets and staff numbers qualification requirements for EMI options in which case the CSOP may provide an alternative.
The CSOP is less flexible than EMI and requires prior approval from HM Revenue & Customs. Individual employees and full time directors may hold unexercised options over a maximum of £30,000 worth of shares. Unlike EMI options the exercise price of a CSOP option must not be less than the market value of the shares on the date the option is granted. There are also certain restrictions on what type of shares can be used.
Exercise of CSOP options can be made conditional on the satisfaction of certain performance criteria.
- No tax charge on grant of the option
- No charge to income tax or social security contributions on the exercise of the option provided that it is exercised more than three years from the date of grant or, if earlier, by certain categories of "good" leavers whose employment is terminated within that period
- A corporation tax deduction is available for the employing company equal to the gain on exercise of the options (that is, the difference between the exercise price and the value of the shares when the options are exercised)
- A corporation tax deduction for set up and running costs
For our full written guide to CSOP options, qualification criteria and the associated tax advantages they offer please contact us.