Unless your company qualifies to grant EMI share options, or adopts a CSOP or SAYE share option plan, the grant and exercise of “unapproved” share options is not particularly tax-efficient, and will become less so as top rates of income tax and NICs rise. Consider using a joint ownership plan as an alternative to a traditional unapproved share option plan. This allows for future growth in value of the award shares accruing to the employee to be taxed as capital gain, not subject to IT/NICs. “Joint Share Ownership Plans” – or “JSOPs” were first developed by David Pett and Wiilliam Franklin in 2002 and have since been successfully adopted by over 20 companies, including a number of fully-listed, AIM-listed and VC-backed companies. A JSOP is not a tax-avoidance scheme and has been fully disclosed to, and the tax treatment of it has been publicly accepted by, HMRC.
An independent company should consider establishing an HMRC-approved Share Incentive Plan (“SIP”) and inviting all eligible employees to invest up to £1,500 per tax year in “own company” shares out of gross salary. Shares are acquired at an effective discount, and growth in value is, for so long as the shares remain in the plan, entirely free of tax. After 5 years, shares can be transferred, or sold and the cash transferred, into a Regulated Pension Plan, with further tax relief available (within statutory limits) for the contribution made.
CT relief is available for a contribution to a SIP (to be used to fund “matching” or “free” shares) applied in acquiring for the plan at least 10% of the issued shares from individuals (founders?)/ trustees, provided that the shares so acquired are passed out to employees as free or matching shares via the SIP within 10 years (with at least 30% passed out in 5 years) and provided also that there is no tax avoidance purpose in the making of the contribution.
CT relief may be claimed for an amount of the share-based payment charge associated with an employee share award if is not otherwise an entitlement to relief under Part 12 Corporation Tax Act 2009. This could, for example, reduce the overall cost of operating a joint share ownership plan (or JSOP) – see 1 above.
It is possible to agree at the time of grant, that some or all of the cost of employer’s secondary Class 1 NICs on share option gains be borne by the optionholder out of his option gain. Many companies – particularly unlisted and high-growth companies – do this on the basis that the entire amount is borne by the optionholder, whereas larger listed companies often choose to retain the entire cost of the employer’s NICs on the whole of any option gains. However, logic suggests that in the latter cases, once shares are vested (i.e. the option is exerciseable), the employee should thereafter bear the cost of the employer’s NICs on any future gain because the decision as to timing of the share acquisition then becomes an investment decision for the optionholder.
If you operate a traditional “long-term incentive plan” (or “L-TIP”) and also have, or could adopt, a CSOP, consider the grant of a CSOP option in parallel with the L-TIP award so that the employee may choose to derive the future growth in value by exercise of the option. In this way the gain may be taxed as capital gain, not as employment income. The L-TIP award would be designed to lapse in respect of a number of shares equal in value to the gain realised by exercise of the CSOP option. That part of the award representing the initial market value of the award shares would still be subject to income tax and NICs when paid out to the awardholder.
If the employee already holds unexercised share options exceeding the £30,000 CSOP limit, then consider combining a joint-ownership award with a “fixed-value” award (rather than make a traditional L-TIP award). In this way, the growth in value over the 3-year vesting period may be taxable as capital gain.
Deferred cash bonuses: determine if it is preferable (given rises in IT/NIC rates) to award a bonus net of tax, but provide that, if the employee forfeits the award as a “bad leaver”, he will nevertheless then receive a sum at least sufficient to compensate for the tax borne on the award he has forfeited.
Bonuses: consider trading a cash bonus for an award under a joint-ownership plan (which is not performance-linked). Although there is no £ for £ direct trade-off, the prospect of deriving growth in the future value of the award shares, taxable as capital gain, may be an attractive alternative. If the company can use new-issue shares then the up-front cash cost of delivering benefit, in the form of future growth, may be substantially reduced.
Whilst we are aware of a number of other ideas being actively promoted by other advisers, it is our policy only to suggest that clients consider the adoption of arrangements which are “tried and tested” and which, in our opinion, are unlikely to be the subject of an HMRC challenge or retrospective change of tax treatment.
Please feel free to contact us for a “no obligation” chat about any of these ideas or about your own commercial goals and how we might assist in achieving them through the establishment of an employee cash-based or share-based incentive plan.
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