Approved Plans/Schemes
Company Share Option Plans (CSOPs)
These are discretionary schemes and can be granted to selected employees. CSOPs can only be established by independent companies of any size provided the company is not controlled by another company. Before granting any options under a CSOP the company must obtain approval from HMRC and must agree a market valuation with HMRC for the shares under the option as at the date of grant.
The company grants the employee an option to purchase shares in the company at some specified time in the future (i.e. three years) at their market value at the date of grant. An employee can be granted approved options with a value of up to £30,000 at the date of the grant. Employees who own more than 10% of the company cannot participate in a CSOP.
Provided the options are exercised after three years there will generally be no income tax liability and no liability to National Insurance Contributions (NICs) when the options are exercised.
Capital Gains Tax (CGT) will be payable on the eventual sale of shares. The capital gain will be calculated on the difference between the sale proceeds and the amount paid for the shares. This will be subject to a flat rate tax of 18% after deducing from the chargeable gain the annual exemption of £10,100. Entrepreneur’s Relief (see below for more details) may be available.
The company can deduct the cost of setting up and running the scheme against profits chargeable to corporation tax. A deduction against profits chargeable to corporation tax is also generally available on exercise based on the aggregate exercise price of the shares.
For further information on CSOPs see: www.hmrc.gov.uk/shareschemes/csop.htm
Enterprise Management Incentive (EMI)
EMI schemes are tax advantageous share options. They are discretionary and can be offered to selected employees provided they are contractually obliged to work for the company or any of its subsidiaries for at least 25 hours a week. EMI is targeted at small, independent companies (with gross assets of no more than £30 million and no more than 250 employees) which are not controlled by another company, to assist them in attracting and retaining high calibre employees.
EMI schemes are Approved Schemes but approval from HMRC is not sought in advance. Instead each time an option is granted this must be notified to HMRC within 92 days of the date of the grant. The company generally needs to agree the market value of the shares with HMRC before options are granted to ensure no income tax (nor NICs) liability arises on exercise.
Share options with a value of up to £120,000 (from 6 April 2008) at the date of grant may be granted to each qualifying employee. The total value of shares over which EMI options are granted by any company cannot exceed £3 million.
There is no tax liability on the grant of EMI options. Provided the exercise price of the option is the market value agreed with HMC and the options are still qualifying no income tax or NICs will be charged on exercise.
Capital Gains Tax (CGT) will be payable on the eventual sale of shares. The capital gain will be calculated on the difference between the sale proceeds and the amount paid for the shares. This will be subject to a flat rate tax of 18% after deducing from the chargeable gain the annual exemption of £10,100. Entrepreneur’s Relief (see below for more details) may be available.
The company can deduct the cost of setting up and running the scheme against profits chargeable to corporation tax. A deduction against profits chargeable to corporation tax is also generally available on exercise based on the aggregate exercise price of the shares.
For further information see: www.hmrc.gov.uk/shareschemes/emi-new-guidance.htm
SAYE schemes have to be offered to all employees though employees can decide not to take part. The company can only operate a SAYE scheme after HMRC has approved all the scheme documentaion. All employees who participate must participate on similar terms. A qualifying period whereby participation is subject to employees having been employed by the company for at least five years may be imposed.
Employees enter into a savings contract for three, five of seven years. Payment must be made on a weekly or monthly basis between £5 and £250, and must be deducted from salary or wages net of income tax. Employees are also granted options to purchase shares in three, five or seven years time at the market value of the date of grant provided that they enter into a savings contract for the fixed period.
HMRC permit the agreed market value at the date of granted to be discounted by up to 20%.
The option will lapse if the employee misses more than six payments, although the employee will still be entitled to take the proceeds of the savings contract plus any interest which has accrued. The option will generally lapse when the employee leaves employment, with the exception of death, personal injury, retirement or redundancy, where the option may be exercised within six months.
At the end of the savings period the employee can decide whether to withdraw the savings together with a tax free bonus or to exercise the option. The employee has six months to decide. Shares acquired under a SAYE scheme can be transferred into an Individual Savings Account or a stakeholder pension on a tax free basis within 90 days of exercising the option. There is generally no tax (nor NIC) liability on exercise of the option unless options are exercised within three years of grant.
Capital Gains Tax (CGT) will be payable on the eventual sale of shares. The capital gain will be calculated on the difference between the sale proceeds and the amount paid for the shares. This will be subject to a flat rate tax of 18% after deducing from the chargeable gain the annual exemption of £10,100. Entrepreneur’s Relief (see below for more details) may be available.
The company can deduct the cost of setting up and running the scheme against profits chargeable to corporation tax. A deduction against profits chargeable to corporation tax is also generally available on exercise based on the aggregate exercise price of the shares.
For further informaiton see: www.hmrc.gov.uk/shareschemes/employer-guidance.pdf
Like SAYE schemes, SIPs are required to be offered to all employees. They cannot be offered to selected employees. The scheme documentation and the market value of the shares must be approved by HMRC before any awards are made.
Under SIPs a company can gift to an employee up to £3,000 worth of shares per tax year, tax free, provided the employee holds the shares in the plan for at least five years. These are known as free shares.
In addition, employees may be allowed to purchase partnership shares out of their pre-tax income, by deduction from pay, up to a limit of the lesser of £1,500 per year or 10% of the employees annual remuneration. These are free from income tax and national insurance contributions (NICs) provided they are held in the plan for at least for five years.
The Company may give further free shares known as matching shares on a pro rata basis to the number of partnership shares purchased. The amount of shares can be capped and in any event cannot exceed two matching shares for each partnership share held. These are also free from income tax and NICs provided they are held in the plan for at least five years.
The final type of share under this plan is the dividend share. An employee may be able to reinvest any dividend received on the above types of shares by purchasing dividends shares. A cap of £1,500 worth can be purchased each year and they must be held for at least three years otherwise they will be subject to income tax.
Any increases in value while the shares are held in the plan are free from CGT. Upon disposal the shares are subject to CGT at the rate of 18% although the annual allowance can reduce the chargeable gain as can Entrepreneur’s Relief.
The company can generally deduct the cost of establishing the SIP, and the HMRC agreed market value of free and matching shares at the time they are awarded are deductible items for the purpose of Corporation Tax provided the participants are resident or ordinarily resident in the UK.
For further information see: www.hmrc.gov.uk/shareschemes/sip_employers.htm
