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Company shares

Although not a new concept, employee ownership is on the rise as it offers a number of benefits for businesses, employees and owners looking at succession planning. We speak to John Dormer, share incentives director at The RM2 Partnership, to find out more

The news is full of stories about takeaways closing as costs spiral, but is it time to re-think the ownership model of these businesses, with the survival of only the fittest a real possibility in the years ahead? 

“Employee Share Ownership Plans (ESOPs) allow employees to own a stake in a business through tax efficient means,” says John. “It promotes positive employee behaviour by encouraging them to think more like business owners, with the promise of future rewards.”

Employee Share Ownership Plans

There are numerous ESOPs available to business owners, offering different benefits and tax advantages, but the three most popular, according to John, are:

Enterprise Management Incentive (EMI) – this discretionary share option plan, provides a flexible, tax efficient way to reward some or all employees, by offering them the opportunity to buy shares in the business in the future, at a price fixed when this offer is made.  

The business must be independent, with fewer than 250 employees and gross assets under £30 million. Options may be granted over shares with a value of up to £250,000 at grant date, with the overall company limit set at £3 million.

EMI options can be granted over different share types, with any exercise price and any performance conditions. The options can be exercised any time after grant, but will typically lapse 10 years after grant.   

Options are free of Income Tax and NICs, but gains will typically be subject to Capital Gains Tax (CGT), but thanks to Business Assets Disposal Relief (BADR), it is usually levied at 10%.

Company Share Option Plan (CSOP) – a discretionary share option plan, for larger or non-EMI qualifying businesses, for all employees or a select few, which can be tailored to meet business objectives with different share classes and performance targets.

The individual option limit is £60,000 and options must be granted at market value. The tax treatment is similar, with participants only able to exercise their options tax efficiently, three or more years after the grant date. Gains are subject to CGT treatment, although BADR does not apply.  

Share Incentive Plan (SIP) – this equitable, all employee share plan provides a potential zero tax rate, with no Income Tax, no NICs and no CGT. Shares can be gifted free of Income Tax and NICs to employees, who can also use pre-tax salary to buy ‘partnership’ shares, which may entitle them to a further two free ‘matching’ shares. 

Specialist advice

“Any business owner should seek specialist advice to ensure their plan is correct and matches their personal and business expectations” advises John. “All plans must comply with current legislation, be registered with HMRC and file returns annually, or the business could be fined or even risk losing the tax advantages of the plan.”

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