Options practical advice
Ashfords practical tips on share option schemes: Part 3 — the alternatives 02 April Article by Ashfords Share So far in our series on employee incentives, we have focussed on EMI options and some of the key considerations companies should make prior to entering into an EMI scheme.
This week we look at some of the alternatives to EMI schemes and take a brief run through some of their advantages and disadvantages. Recap on EMI scheme requirements In the first blog in this series, we set out the conditions that a company must meet to be eligible for an EMI scheme.
Alternatives to EMI Options As alternatives, there are both tax-advantaged and non-taxed advantaged arrangements that a company can consider. We will also briefly consider unapproved schemes as it is helpful to outline tax position by comparison of a non-tax advantaged scheme.
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The company must either be listed on a stock exchange, or be an Independent Company. The advantages to the CSOPs are that: the increase in the value of the shares between the grant and the exercise of the options should be free of income tax and NICs providing they are not exercised early, i.
The employee will need to enter into a HMRC-certified savings arrangement, which will require a payment to be made every month for three to five years.
At the end of the term, the employee can use the proceeds to fund the exercise price of the option. Companies that set up SAYE schemes must be either be listed on a recognised stock exchange or be an Independent Company and are typically larger companies and groups.
The SAYE schemes are all-employee schemes, meaning all eligible UK-resident employees and full-time directors must be invited to participate, although a qualifying period of service can be imposed.
A company can decided to offer either the Free Shares or Partnership shares, or both. Matching shares and Dividend shares are not covered further in this note.
The disadvantages to SIPs are: they can be complex to set up, with high administration costs and ongoing HMRC registration requirements; the plan shares needs to be offered to almost all employees; employees become the beneficial owners of the shares, rather than option holders; and the tax rules are complicated and tax reliefs can be clawed back in certain circumstances.
Unapproved Share Options This is an option which does not have tax favoured status of an EMI scheme or some of the schemes considered above. The advantages of an Unapproved Option Scheme are: it is simple to set up and administer; it allows a company to grant additional options to an individual who may have exceeded limits under other schemes; flexibility; and there is no income tax charge on the grant options practical advice the option.
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For most smaller growth companies the above schemes will not be as appealing as EMI schemes that we have considered so far in this series. If an EMI scheme is not viable, careful consideration is needed at the outset as to options practical advice alternatives would work for your company and employees. Whilst certain plans offer some favourable tax treatments, this should be weighed against the administration requirements and costs of running those schemes.
If you are considering equity incentives or have any questions on this article, feel free to get in touch with an expert by contacting Angus Bauer, Partner at Ashfords LLP on a. Our final blog, next week will cover what to look out for on an exit of an EMI scheme. Sign up to our newsletter Looking for investment?
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