FOR KEY PEOPLE IN LISTED COMPANIES
The table below explains the key features of 9 different solutions. So that you can compare them, we have scored each scheme for:- Tax efficiency in the UK
- Ease of setting up
- Overall incentive and reward value
This is a general guide only and should not be treated as advice. Any arrangements involving trusts or other third parties should be reviewed carefully in light of anti-avoidance legislation. Copyright, Postlethwaite 2011
EMI share options |
How it works:An option - the right to buy shares in the future at a fixed price |
Tax efficiency (individual) |
Tax efficiency (Company) |
Ease of setting up |
Overall incentive and reward value |
| No income tax (IT) or National lnsurance (NICs) unless disqualified. CGT on sale of shares. | Corporation tax (CT) deduction on option gains. No NICs. | No pre-clearance necessary although option grants must be notified to Revenue. | Very simple to explain, no risk, very tax efficient. |
Other issues:Limited to smaller companies carrying out "qualifying activities". |
Approved options |
How it works:An option - the right to buy shares in the future at a fixed price |
Tax efficiency (individual) |
Tax efficiency (Company) |
Ease of setting up |
Overall incentive and reward value |
| No IT or NICs if options held for at least three years. CGT on sale of shares. | CT deduction on option gains. No NICs if options held for at least three years. | Prior Revenue approval required. | Simple to explain, no risk, tax efficient. |
Other issues:Only certain kinds of share may be used. Options may not be granted at a discount. |
Non-approved options |
How it works:An option - the right to buy shares in the future at a fixed price |
Tax efficiency (individual) |
Tax efficiency (Company) |
Ease of setting up |
Overall incentive and reward value |
| IT and NICs on option gains, due when option is exercised. CGT on any further gains between exercise and sale. | CT deduction on option gains. NIC liability may be transferred to individual participants. | Option grants must be notified to Revenue after end of tax year. | Simple to explain, no risk, not tax efficient. |
Other issues:None. |
Share purchase – immediate payment |
How it works:Employee acquires ordinary shares and pays for them in full |
Tax efficiency (individual) |
Tax efficiency (Company) |
Ease of setting up |
Overall incentive and reward value |
| No IT or NICs if shares purchased for market value. CGT on sale of shares – but shares must be paid for when first acquired | No CT deduction if shares purchased for market value. No NICs on same condition | Simple to explain, tax efficient treatment of grown but there is risk. |
Other issues:None |
Share purchase – deferred payment |
How it works:Employee acquires ordinary shares and pays for them later in time |
Tax efficiency (individual) |
Tax efficiency (Company) |
Ease of setting up |
Overall incentive and reward value |
| No IT or NICs if shares purchased for market value. CGT on sale of shares. | No CT deduction if shares purchased for market value. No NICs on same condition | Simple to explain, there is risk, tax efficient. |
Other issues:Liability to pay for the shares is deferred but (unlike with options) never eliminated. Anti-avoidance legislation will in some cases make arrangements of this kind harder to establish. |
Restricted shares |
How it works:Employee acquires ordinary shares which are initially subject to restrictions e.g. forfeited if employee leaves within a defined period. |
Tax efficiency (individual) |
Tax efficiency (Company) |
Ease of setting up |
Overall incentive and reward value |
| IT and NICs on vesting – but participant and company may elect to pay this upfront. CGT on any further gains between exercise and sale. | CT deduction on vesting. NICs may be transferred to participant | Simple to explain, no risk (potentially), not tax efficient. |
Other issues:None |
Joint Ownership (awarding an interest in the growth in value of shares) |
How it works:Employee has in interest in growth in share value but not current value |
Tax efficiency (individual) |
Tax efficiency (Company) |
Ease of setting up |
Overall incentive and reward value |
| No IT or NICs if interest purchased for market value. CGT on sale of shares. | No CT deduction if interest purchased for market value. No NICs on same condition | Usually operated with an employee benefit trust. Other documents also required. | A little more complex to explain than other schemes, no risk, tax efficient |
Other issues:There are likely to be valuation questions on receipt of the interest in the shares. Tax treatment may be subject to further Government review |
Cash payment on sale of the Company or other event |
How it works:Employee receives cash bonus triggered by a particular event |
Tax efficiency (individual) |
Tax efficiency (Company) |
Ease of setting up |
Overall incentive and reward value |
| IT and NICs due when bonus paid. | CT deduction on payment. NICs may not be transferred to participant directly. | Payroll issue only | Simple to explain, no risk, not tax efficient. No true equity involvement. |
Other issues:None. |
EBT bonus |
How it works:Employee receives or is allowed use of (eg by loan) cash or other assets. |
Tax efficiency (individual) |
Tax efficiency (Company) |
Ease of setting up |
Overall incentive and reward value |
| Disguised remuneration rules will often mean that a UK taxpayer must pay full IT and NICs on value of funds made available to him. | CT deduction only available to the extent individual pays income tax on benefit received from EBT | Trust and bespoke documents required | A little more complex to explain than other schemes, upfront tax charge often now likely |
Other issues:An income tax charge may arise on the full value of funds when they are “earmarked” for an employee - even if he is only lent them, or he receives no benefit at all. |
