Employee Share Schemes - no longer for large companies only

Changes in recent budgets make Employee share schemes affordable for most SMEs. There are no absolute rules but probably a turnover over the Million is advisable.

Why should you consider it?

• Succession Management. When it comes time for one set of owners / directors to exit and others to join there is generally no more tax efficient way to effect that change. With Business taper relief shares can be sold 2 years after the shares, or share options, have been granted and you pay only 10% tax and no National Insurance. It creates an internal market for the company's shares that might otherwise not exist.
• Staff retention. When you find good people you want to retain them, whether management, or shop floor. This can be the best way to reward them. As above, all pay only 10% tax and no National Insurance if they take up share options and sell the shares after 2 years. So that bonus goes so much further. Should the employee be tempted by another job they will then have to think about the potential loss if they go, and their new employer might not have such a scheme. Generally options lapse if someone leaves from their own choice.
• Encourages everyone to think as one team. You might think this sounds idealistic and 'not real world'. Yet those who have done it report this effect.

Schemes available for SMEs

Of the various recent government initiatives, there are two of prime interest to the SME sector. There is a simple process in order to gain Inland Revenue approval for these initiatives ('Approved Schemes') :

• Enterprise Management Initiative (EMI). This is the most flexible scheme available and is only open to companies with less than £30m total Assets. With this scheme you can set the share option price and also provide the share options at a low (or even zero price) according to a set performance criteria.
• Share Incentive Plan (SIP). If you want, a plan that provides incentives for staff to invest in the company this plan has advantages. You can offer things like one free share for each that they buy. With any share option scheme, the business also creates an Employee Benefit Trust (EBT). The EBT issues the share options and shares. If desired shares issued can be non-voting stock.

Tax

Major tax benefits can derive from the schemes. Already mentioned is that 2 years from the granting of share options someone may exercise the option(s), immediately sell and pay only 10% tax. That compares with 51% for the higher rate tax payer when you include National Insurance and 36% for the standard rate tax payer. In addition the business does not have to pay Employer National Insurance either. The same tax level, of 10% applies when the long-standing shareholders sell some of their shares to the EBT.

Shares that rise in value whilst held within an onshore EBT may create a capital gains liability. This is balanced by corporation tax relief gains on the sale of shares. In some instances, but not all, it can be advantageous to have the EBT offshore. As you can appreciate, the full tax position is not something that can be fully explained in a column or two here. We are happy to come and explain it in full at any time.

RM2, the Sig Biz Advisors partners for Employee Share Option Schemes.

We have partnered with RM2, specialists in setting up Employee Share Schemes for the SME sector. They have been doing this for over 10 years and have a wealth of experience to ensure that it schemes are set up to maximum advantage.

RM2 can work with your accountants to set an Employee Share Option scheme up. This is specialist work and not the sort of thing that most small or medium sized accounting firms should do themselves.

Very Important Note

RM2 is one such qualified advisor.

As always give us a ring for more information on 01 296 630 692 or use the web form by pressing the 'Contact' button below.