Abacus Online July 2001
SHARE OPTIONS - COULD THEY WORK FOR YOU?
Introduction
In today's transitory market-place employers need the right incentives packages to encourage loyalty and retention of key employees. The tax benefits of share option schemes have made them an important part of the remuneration package.
What are share options?
A share option is a right granted by an employer or a shareholder in a company, generally to an employee or director, to acquire shares in the company at a price set when the option is granted. The optionholder can exercise the option and buy the shares at some point in the future at the option price which should be cheaper than the market value of the shares at the time of exercise.
How do employees benefit from share options ?
The granting of share options to employees has several advantages for them.
Benefit from obtaining and retaining a shareholding in a company
Benefit from the money following an increase in share price if the shares are sold
Benefit from tax advantages and tax savings
Encourage employees to feel part of the company
What is in it for the employer/shareholder?
The employer should also gain from a share incentive scheme through the benefits of motivating the workforce and encouraging a sense of belonging within the company. Some of the benefits for the employer are:
Aid the recruitment of key employees especially those in senior management positions
Motivate staff to increase productivity and performance and work harder
Encourage staff retention and thereby reduce staff turnover and recruitment costs
Forms part of the overall remuneration package with little cash outlay on the part of the company
Encourage a team environment and business culture through ownership of part of the company
Increased growth in the profitability and market value of the company
Key aspects of share option schemes
Link exercise of options to performance criteria which can be based on company, team or individual performance
Exit event to allow sale of shares after exercise of options particularly for private companies. This can be achieved by a flotation; trade sale or a management buy out which may be linked to the retirement of a major shareholder
Enable management team to obtain a stake in a company
Which schemes are on offer?
The Government has introduced a number of new share incentive schemes in the last year or so, with the aim of encouraging greater share ownership and a stakeholder society. The key share option scheme for many companies has been the Enterprise Management Incentives ("EMI") scheme.
The EMI Scheme
Extremely tax efficient for the employee
No income tax on grant or exercise of the option
The potential of a 10% tax charge on the disposal of shares after 4 years (or 2 years if the proposals concerning GCT announced on 18 June 2001 are enacted)
Easy to operate, with limited Inland Revenue involvement
Corporation tax deduction for the costs of establishing and running the scheme
The Downside
Some owners of companies raise concerns about the loss of value in their own hands in granting share options to employees. However, any short term loss in value can be outstripped by a greater increase in the overall value of the company particularly if the exercise of share options is linked to company performance. As a result the shares retained by the original owner soon achieve the original value prior to the grant of the option.
Do you want to know more?
If you would like to learn more about share options and how they could work for you please contact Steve Cook.
Tax Investigations
These are becoming more business-like. New targets require Revenue officers to show non-compliance in 75% of the cases they investigate. In the past, they only had to complete a certain number of cases without any requirement to collect extra tax. This means that inspectors will now be more selective in the cases they take up, though the ones chosen could take longer to resolve as officers spin them out in order to find something wrong.
The good side to all this is that most law-abiding taxpayers will be less at risk from speculative enquiries. Those who are now subjected to an enquiry are probably in for a tough time. With a greater emphasis on accounting principles, traders with incomplete records should be extra vigilant - our advice to clients will continue to focus on improving their records in advance of an enquiry.
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Please contact us to discuss the above furtherTel: 01753 888211 Fax: 01753 889669 Email: abacus@nunn-hayward.comNunn Hayward, Sterling House, 20 Station Road, Gerrards Cross, Bucks SL9 8EL.
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Registered Auditors, Licensed Insolvency Practitioners and authorised to carry on investment business by the Institute of Chartered Accountants in England and Wales.
This publication has been prepared as a guide only to topics of current financial and business interest. No responsibility for loss occasioned to any person acting or refraining from acting as a result of any material in this publication can be accepted by us. All rights reserved.
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