EM Law | Commercial Lawyers in Central London
Employee share options solicitors
Granting share options is a great way to reward employees and keep them engaged in a business. They can be a useful alternative to a business having to find cash to pay bonuses or to cover increases in salaries. Share options can also be structured in a tax efficient way.
What are share options?
Share options are rights to buy shares in a company at a set price.
The price may be nil.
Share Option Schemes
A company may introduce a share option scheme to reward one, several or all of its employees. The scheme will be governed by a set of rules that address issues such as:
- how many shares a participant can buy.
- when can the participant buy the shares (exercise the option).
- the price that the participant must pay for the shares (the exercise price)
- whether there are any conditions attached to the participant being able to exercise the option (for example, performance conditions or length of service conditions)
- what happens if a participant leaves the company.
Common Features
Unless an employee is being rewarded for past performance, share option schemes usually require employees to wait for a certain period of time before they can exercise their options and buy shares. Three years is common. Alternatively, the right to exercise the option may be triggered by some event e.g. a listing.
Usually, the conditions of the scheme prevent the participants from being able to sell or transfer their options to someone else.
The scheme should provide for what should happen if a participant leaves the company. Often the rules will differentiate between someone who is a “good leaver” (this could, for example, be someone who is made redundant) and someone who is a “bad leaver” (this could, for example, be someone who commits misconduct.
It is common for scheme rules to include provisions whereby the option will lapse in certain circumstances. These could include where the participant is a “bad leaver” or does not exercise the option within a certain time period.
Tax
The starting position is that an employee who exercises an option must pay income tax on the value of the shares they acquire. The liability is assessed on the basis of the value of the shares less the price paid for them. National insurance contributions (employee’s and employer’s) can also apply in specified circumstances, although it is possible to structure an option so that any employer NICs costs are passed to the employee.
However there are some arrangements that are tax advantageous. These are:
- SAYE option schemes
- Company share option plans (CSOPs)
- Enterprise management incentives (EMI options)
Under these schemes the employee can benefit from not having to pay income tax or NICs. Instead, capital gains tax may apply when the shares are sold.
The employer company may be entitled to a corporation tax deduction equal to the amount on which the employee pays income tax (or would have done if the option were not tax-advantaged).
For any questions you may have concerning share options contact our solicitor Suzy Giele.