Employee Share Scheme Tax

ManCoin Ltd is a recently established Manchester-based fintech company. It was founded by John and currently has three other employees. John recognises that to realise his ambitions to grow the business, he needs more than his and his staff’s existing technical skills including senior marketing and finance expertise.

The company has plenty of interest from potential clients from the outset but, as yet, has received little in the way of income. It is therefore difficult to pay high salaries to attract the right talent to take on these key roles and John is interested in other ways of remunerating key recruits while conserving cash.

Jack and Jill are marketing and finance professionals respectively. As part of their remuneration, John offers them options under an EMI scheme. These will permit them to acquire 10% each of the issued share capital subject to meeting predefined performance hurdles. They will acquire the shares at their current market value, which, as the company, while promising, is still young, will be relatively low.

Fast forward three years and the company has expanded rapidly and now has 25 employees. There is interest from third parties in acquiring ManCoin and, after some discussion, an offer that is too good to refuse is received to acquire the company for £5 million.

Having exceeded their performance hurdles and become entitled to exercise their options, Jack and Jill exercise their share options immediately prior to the sale, acquiring their respective 10% shareholdings for £1,000 each (being the value of a 10% interest when the options were granted to them on joining the company) and then immediately disposing of them for £500,000 each.

The difference between the acquisition cost of £1,000 and the disposal proceeds of £500,000 is subject to capital gains tax rather than income tax and, as they are employees/officers of the company, and had been throughout the two years to the date of sale of their shares, they qualify for Entrepreneurs’ Relief meaning the gains are subject to tax at 10%. Jack and Jill, therefore, take away around £450,000 each after tax.

If they had received bonuses, the net take-home would have been significantly less, with bonuses taxed, like salary, at income tax rates of up to 45%, and, in addition, being liable to the employee and employer Class 1 NIC.

1. ‘Approved’ schemes

An approved employee share scheme can include Company Share Option Plans (“CSOPs”), Enterprise Management Incentives (“EMI”), Share Incentive Plans (“SIPs”) and Save As You Earn (“SAYE”). They are usually afforded some form of statutory relief that makes their acquisition by employees, and award by employers, quite efficient from a tax perspective.

2. ‘Unapproved’ schemes

Unapproved plans, such as Growth Share Plans, Long-Term Incentive Plans and Unapproved Share Option Schemes, are not approved by HMRC and as such do not offer the same types of statutory tax reliefs that are usually on offer for approved schemes. However, these schemes tend to afford much greater flexibility to the employer and it is still possible to put together such a scheme that meets the employer’s objectives in a tax-efficient manner.

Each type of employee share scheme is governed by different rules, eligibility and tax treatment, which means specialist advice is essential to ensure compliance while deriving maximum benefit for the company and the employee.