Which scheme is right for your business?

Selecting a scheme which suits your needs

EMI Schemes

Let’s cut to the chase. If you run a SME then an Enterprise Management Incentive (EMI) scheme is more often than not going to be the right choice for your business. These schemes give employees a stake while affording you several key protections.

Benefits of an EMI scheme:

Flexible – the terms of the options can be made to match your business requirements
Tax treatment - options can be structured so that the employee doesn’t pay income tax or NIC when they exercise their options
CGT relief – when the employee sell their shares they can benefit from a 10% rate of CGT

Employee Ownership Trusts

Employee Ownership Trusts or EOTs own a controlling stake in the business on behalf of employees. These were introduced in 2014 as part of the government’s ambition to encourage employee-owned businesses in the UK. There are various tax benefits for shareholders.

Ideal for exit where the founder(s) is aiming to secure their legacy with a trusted team.

"Whatever your circumstances, having the option of using an EOT helps to broaden your choices as an owner."

...

Read: why should you consider an EOT as part of your exit strategy?

CSOPs

Company Share Option Plans (CSOP) have been around for a long time but were seen as inflexible and limited. Changes in the 2023 Finance Act mean that CSOP is far more attractive to companies that, for one reason or another, do not qualify for EMI.

Benefits of a CSOP:

Flexible – options can be granted over new share classes with special rights tailored to your business
Tax treatment – provided the employees hold the options for 3 years then there will be no income tax or NIC when the options are exercised
The three year holding period is waived if the options are being exercised on a sale transaction

The right scheme, at the right time

The right share scheme for your business will depend on your stage of development, growth strategy, culture and commercial objectives. It’s important to be clear about your motivation for giving people equity.

Ask yourself the following questions:

Who do I want to incentivise and for how long?
Do I want to give people shares right away or would I like them to buy into them at a future point?
Do I want key stakeholders to have decision making powers?
Do I need performance milestones to be reached before releasing the equity?
What happens if people with shares or share options leave the business?
How much equity do I want to give away?
Is tax saving a key driver for both the business and employees?

What is your biggest barrier to retaining employees?

Matching salary offers from other companies
Not having a clear route to reward top performers
Your team not engaging with your businesses goals

Ordinary vs growth shares

Ordinary shares: are a real share in your business (rather than an option to buy at a future date) and these can be given to anyone. These are typically shares that business owner(s) or investors will hold.

Growth shares: are like ordinary shares but the recipient only benefits from the growth in value of the share. This means that financial ‘milestones’ need to be reached before equity is released.

Ideal for founders looking to bring people into the business once it has built some initial value. Conditions can be applied to growth shares to protect the business.

Key features

Gives people real ownership immediately
Recipients can benefit from dividends
Recipients can receive voting rights
Shares may incur capital gains tax
Can be an upfront tax charge

Share options

Options allow recipients to buy shares at a later date for a pre-agreed price.

Benefits of share options:

Tax arises only when the options are exercised – often at the point that the company is being sold
The employee holds options, not shares - they have no rights to vote or dividends until the options are exercised
There is tax relief for employers when employees exercise options
Share options can be very flexible - there is usually no requirement for all employees to have the same options or terms

There are statutory share option schemes that can prevent or mitigate the tax charges when options are exercised.

Tax-advantaged share schemes

Different share schemes will suit different businesses. There are four Government approved share schemes that offer tax benefits, but there are a also a variety of non-qualifying arrangements that can be entered into as well. The latter tend to be less tax-efficient but can be a better path in certain circumstances.

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Share schemes: an overview

	EMI OPTIONS	CSOP OPTIONS	GROWTH SHARES	ORDINARY SHARES
Tax efficient for employees	YES	YES	YES	NO
Tax efficient for non-employees	NO	NO	YES	NO
Incurs tax on award	NO	NO	NO	YES
Incurs tax on exercise	YES	NO	N/A	N/A
Incurs tax on sale	YES	YES	YES	YES
Benefits from entrepreneur's relief	YES	NO	NO	NO
Shares issued immediately	NO	NO	YES	YES
Can be conditional	YES	YES	YES	NO