Share Scheme alternative approaches

This sets out the main alternatives to EMI and the Revenue-approved employee share schemes:

Way of acquiring shares	Advantages	Disadvantages	Taxation treatment	Comments
Non-approved options	Work like EMI options and have the same flexibility but without the tax efficiency	Income tax (and possibly NI) due on option gains (see column to the right)	On option exercise, income tax (and possibly NI) is due on the difference between the exercise price paid and the value of the shares at the time of exercise Option gains are corporation tax deductible	Worth considering if the flexibility of options is attractive and tax efficiency is not a priority or cannot otherwise be achieved. Also known as long term incentive plans.
Hurdle shares	A tax efficient form of equity reward for super-performance. Employee acquires shares of a special class which will only have capital value once the Company's overall value has grown above a specified threshold Shares have low or zero initial value so can be acquired free or for nominal payment without tax becoming due, any subsequent value growth being subject to CGT on sale	Requires changes to Articles of Association May impact on capital returns to current shareholders Only rewards 'super-performance' May not be suitable if further equity investment is anticipated and may be difficult to extend participation to new employees	No (or little) income tax and NI when shares initially acquired Any financial reward (sale price of hurdle shares) is subject to CGT No corporation tax deduction for the Company	A possible adjunct to other share ownership arrangements. Perhaps most suitable if the Company's shareholders are focussed on an exit at or above a certain value
Share purchase deferred payment	The director/employee is permitted to pay for their shares over a period of time. No cost to the Company or its shareholders Once shares have been acquired, their growth in value is subject only to capital gains tax.	May be a little more complex to administer and communicate than a simple share purchase. Cash disadvantage for the Company in not obtaining immediate payment	No tax breaks available, although this arrangement does have these characteristics: Either the unpaid amount is subject to interest (at at least the HMRC Official Rate, currently 6.25%) or, if interest free, employee is subject to annual income tax/NI on the amount of unpaid interest as benefit in kind. Growth in share value from date of acquisition is subject to CGT. No corporation tax deduction for the Company.	Liability to pay for the shares is deferred but (unlike with options) never eliminated.
Restricted shares	Can be a more tax efficient alternative to a simple purchase of shares by reducing the initial value of shares and so the purchase price. Payment for the shares can be deferred	To obtain the tax benefit of this scheme the employee will be required to pay income tax/NI on initial reduction in shares' value caused by restrictions on shares (e.g. forfeiture if the employee leaves within a specified period). Risk of forfeiture of shares may make this less attractive for employee.	Growth in value is subject only to capital gains tax, so long as employee and Company agree that income tax/NI be paid on initial reduction in share value resulting from restrictions Company can claim a corporation tax deduction for increase in share value which results from any eventual lifting of restrictions	Worth considering if employees have confidence that share value will rise
Awarding an interest in the growth in value of shares	A tax efficient form of equity reward, similar in effect to EMI options and which could be used in companies which do not qualify for EMI	Complex and expensive to establish Value of interest in shares when granted gives rise to an accounting cost	Initial value of employee's share interest is low so there is a low initial income tax and NI charge Growth in value is subject to CGT No corporation tax deduction for the Company	Only recommended if a very high importance is placed on creating a new form of tax efficient reward and other solutions are not considered suitable.

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