Law & Tax

Tax advantaged executive share plans

Employee Incentives - Tax advantaged executive share plans

There are two statutory executive share plans that carry significant tax advantages, the EMI and the CSOP.  They are sometimes called "approved" plans.  They can also be used  to make grants of options to all employees, not just executives.

EMI Options

Enterprise Management Incentive (EMI) options have been specifically designed by the UK government for smaller companies.  They are very flexible in terms of plan design, involve little red tape and are relatively cheap to implement.

Up to £3million of shares in total can be put under option, with individual employees being allowed to hold unexercised options over up to up to £250,000 worth of shares.

Importantly, they carry very attractive tax advantages.

Qualification

In order to qualify to grant EMI options the main requirements are that the company is independent (i.e. not under the control of another company), it must have gross assets of less than £30 million and not more than 250 employees group-wide.

Tax advantages

  • No income tax or national insurance contributions are payable on the exercise of EMI options 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 applies when shares are sold. However, if the option was granted more than one year prior to sale, a special CGT rate of 10% may apply (provided certain other conditions are satisfied).
  • 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)

Summary

EMI options are the most popular choice of share incentive for smaller companies as they offer the greatest potential tax benefits of any of the tax advantaged plans.

The key to getting the most value from EMI options is to identify controls on their grant and exercise which are 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 although the requirements have been relaxed in recent years.  Individual employees and full time directors may hold unexercised CSOP 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 the type of company that can grant CSOP options.

It is common for the exercise of CSOP options to be made conditional on the satisfaction of certain performance criteria.

Tax advantages

  • 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)

Summary

CSOP options can offer valuable tax breaks. Despite the £30,000 limits applicable to CSOP options, they can still be a valuable addition to an employee's overall remuneration package. Now that specific HMRC approval is no longer required, CSOP options are likely to become increasingly popular.

For our full written guide to CSOP options, qualification criteria and the associated tax advantages they offer please contact us.

Law & Tax Services