What kind of share scheme?

We work mainly with private and smaller listed companies. We know that your company faces its own challenges and, rather than taking an off-the-shelf or commodity solution, it will need a share scheme that's been carefully designed to help it meet them. Our focus is on helping you find the right share scheme design, then putting it in place.

Key Steps

If you ask for our help in creating your share scheme, these will often be the principal steps:

• Listening. We'll ask you to tell us about your business, future plans and why you want a share scheme;
• Design. We will recommend to you a carefully considered solution (sometimes a choice of solutions) tailored to your company's particular needs. We'll explain clearly and concisely how it will work, any tax points and the principal legal steps you'll need to go through. We can also run financial models to help you decide how many shares you need to use;
• Implementation. We will produce the legal documents, using our tried and tested writing style and guidance notes to ensure you understand what they mean. We will also look after all necessary clearances - for example with the HM Revenue and Customs - and help you explain how the scheme works to your participating employees;
• Aftercare. We can help you address any questions or issues arising during the life of your share scheme, and, if you require, can arrange for assistance with your scheme's administration, or for this to be outsourced.

Throughout, you will be looked after by the same qualified lawyer that we have assigned to you, with Robert Postlethwaite retaining personal knowledge of your scheme's progress and available to discuss it with you.

Building blocks for your share scheme

One of the first questions you need to think about is whether you want a share scheme for one or more key employees, or to spread ownership more widely.

You should also think about choosing a scheme which doesn't make employees pay income tax on the benefit they derive from it. For existing shareholders, this is important because it enables a greater after-tax benefit to be delivered to employees from a given number of shares, minimising how much of the company's value they need to share. Employees have the prospect of receiving a benefit which is only taxed when turned into cash, and often at a lower rate than a simple cash payment.

Your key people

There are two share schemes which deliver financial reward to key employees, free of income tax. Both of these are share option schemes:

• The Company Share Option Plan (CSOP).
  No income tax (or National Insurance) on option gains (the paper gain made when, by exercising an option, an employee buys shares for less than their market value). Only when the shares are eventually sold, turning paper gains into cash, is any tax payable - but it will be capital gains tax (CGT), often resulting in a significantly lower rate of tax compared with income tax.

• Enterprise Management Incentives (EMI options).
  Aimed at smaller companies (£30 million gross assets or less), with certain businesses excluded. Tax reliefs are the best of any UK share scheme, and perhaps the best in Europe. Like the CSOP, option gains are subject to CGT, but EMI options can be designed in a more flexible way. If you tell us what your company does and whether it is a subsidiary of or controlled by another company, we can give you some further guidance on whether it may qualify to grant EMI options, although no reliance should be placed on that until you have taken formal professional advice.

Detailed conditions apply to each of these share schemes, and you have various choices about how to structure them. If your company can't meet any of the conditions, there are plenty of other approaches, but any financial benefit employees receive is likely to be subject (at least in part) to income tax and perhaps also National Insurance. [Some alternative approaches]

All your employees

There are two all employee schemes which give income tax relief for UK taxpaying employees:

• Save As You Earn (SAYE) share options - often called Sharesave.
  As its name suggests, this is an option scheme. Employees who agree to save a fixed monthly amount (minimum of £5, maximum of £250) for (normally) three or five years are granted options to buy shares at the end of the savings period, using the amount they will have saved plus a tax free bonus. The option exercise price may be set at up to 20% less than the shares' value at the time the option is granted. At the end of the savings period, each employee can choose whether to exercise their option, or simply keep the savings plus tax free bonus. 

  No income tax (or National Insurance) on option gains (the paper gain made when, by exercising an option, an employee buys shares for less than their market value). Only when the shares are eventually sold, turning paper gains into cash, is any tax payable - but it will be capital gains tax (CGT), often resulting in a significantly lower rate of tax compared with income tax. Also, it may be possible to eliminate CGT entirely by transferring the shares into an ISA. 

• The Share Incentive Plan or SIP.
  This gives a choice of different ways in which employees may acquire shares.
  These are the main ones:

  Purchase - employees may buy Partnership Shares out of their pay, with full income tax relief. For example, an employee investing £1000 of their gross pay in shares in their employer company will not have income tax or National Insurance deducted, so they will have shares worth £1,000 allocated to them.

  Free - employees may be allocated Free Shares, without being required to pay income tax or National Insurance on their value.

  Matching - employees may be allocated up to two Matching Shares free for every one Partnership Share they agree to buy - again without being required to pay income tax or National Insurance on their value.
  

Shares must normally be left in a special trust for five years, any growth in their value over that time being free of tax. Various other detailed conditions apply.

You have various choices about how to structure each of these schemes. If your company can't meet any of the conditions attaching to SAYE options or the SIP, there are plenty of other approaches, but any financial benefit your employees receive may in some cases be subject (at least in part) to income tax and perhaps also National Insurance. [Alternative approaches]

Communication and Training

For your share scheme to succeed, you will need to explain it clearly and simply to your participants when it's launched, and keep them informed about your company's performance over the scheme's life. We produce crystal clear share scheme communications - written guides, slide shows, intranet pages and other media - using communication styles suitable for your particular employees.

If you have employees who need training in share schemes, please tell us about your needs and we will suggest a training solution. We are enthusiastic and engaging training providers, able to demystify share schemes for any audience. Since the beginning of 2003 over 600 people have significantly improved their share scheme knowledge in courses which we have designed and delivered.

Please contact us to tell us more about what you want to achieve so we can help you work out the best potential solution.