FAQs

Q: Why are share options popular?
A: Share options are favoured by employees because there is no upfront risk. Owners often prefer options because they do not part with the shares until the employee exercises their option and buys the shares. Typically, this happens when the employee knows he or she can sell their shares and realise a profit, for example, on a company sale.

The option exercise and number of shares can be made conditional on time (employee retention), performance (employee motivation) or triggered by an event, such as a company sale (retention, motivation and reward).

Option schemes can be made tax and NIC efficient for both employee and employers. Also, with the use of employee benefit trusts, a market can be made for the shares, and existing shareholders can sell some of their shares if they wish.

Q. Tax approved options - are they really worth bothering with?
A.Certainly - read on..

Adviser: What are you celebrating?
Executive: My company's being bought. I'll be able to cash in my share options. They're worth about £50K. I'm going to buy my dream car.
Adviser: Are the options tax-approved?
Executive: No, don't think so. Does it matter?
Adviser: You'd better sit down.

Adviser scribbles out some figures.

	Unapproved options	Tax approved options
Potential gain	£50,000	£50,000
Tax	£24,340 Income tax and NIC (40%+1%+7.68%= 48.68%)	£7,272 Capital Gains Tax (18% on gain after unused CGT allowance of £9,600)
Net amount	£25,660	£42,728

Executive: 25K. That's it?
Adviser:Afraid so.

Notes: The example assumes the executive is a higher rate taxpayer and the unapproved option rules provide that the employee must pay the employer's NIC (which is common). The employee gets tax relief on this, so with employer's NIC at 12.8%, the amount charged is effectively 7.68%.

Q: Trading conditions are difficult at the moment and I need to retain my best employees to compete - could a share plan help?
A: Yes, provided employees understand how the plan works, what the potential rewards are and when they might be obtained. Everyone knows that if a company is making losses, or just breaking even, pay rises and bonuses are not likely. A properly structured share option plan could be the answer to conserve cash and keep your key employees.

Q: Can share plans be used in succession planning?
A: Yes - but don't leave it too late ..!

Share plans can form part of a business succession plan. Making equity available to key employees who are to take over day-to-day running of the business demonstrates an owner's commitment to them.

Share options can be aimed at senior employees with a mix of performance and time-based targets. If owners want to spread the equity wider, an all-employee Share Incentive Plan can be used to deliver awards of free shares based on the company's performance. Employees who leave within three years of a free share award will normally lose the shares except for 'good leavers', which can help employee retention.

Because discretionary employee benefit trusts and SIP Trusts form part of the share plan arrangements, it can be possible for owners to sell part of their shareholding over time into the trusts on a CGT basis (tax-efficient). Professional advice is essential in this area.

Some types of share plans deliver benefits over the medium to long term so it's a good idea to implement such plans early.

Take your first steps towards the golf course - start work on your succession plan today.

Q: Can foreign-owned companies set up tax approved UK plans?
A: Yes, but it is important that UK legislation is complied with.

Overseas parent companies, especially European and North American companies, commonly offer their UK employees an opportunity to participate in group share option and share purchase plans. However, if share plans are extended to the UK without taking into account UK tax rules, the income tax and NIC treatment can be very unattractive for employees and the UK employer.

Overseas option plans can be modified to qualify as UK tax approved plans in the form of a Company Share Option Plan or an Enterprise Management Incentive (see Terminology).

Free offers of shares or employee share purchase plans can be rolled out as tax approved Share Incentive Plans (see Terminology) with NIC savings for the employer.

Obtaining parent company buy-in is crucial so it is important to start a review process early or as soon as you learn that share plans may be open to your UK employees.

Take our survey for foreign-owned companies here