November 2012 Liz Hunter

Share Schemes Retaining & Rewarding your dream Team

Success Story • A wireless payment company wanted to incentivise senior

staff to build shareholder value ahead of an exit.

• In 2006 we implemented a tax-efficient EMI share option scheme for them, with an exercise price of £6.15 per share.

• The company was sold in 2011 for £117 per share.

• Several employees made six figure gains and two employees became millionaires.

Equity – EMI vs. Cash or USOP Options • £150,000 • £42,000 CGT (28%) • £108,000 Net gain • £0 E/er NICs • AND if Entrepreneurs’ Relief

applies it’s 10% tax and net gain re Options is £135,000!

Cash bonus

• £150,000

• £78,000 PAYE (52%)

• £72,000 Net gain

• £20,700 E/er NICs (13.8%)

£150,000 £170,700

Benefits • Feeling of ownership

• Further corporate objectives

• Promotes profit awareness

• Striking tax advantages

• Cash flow advantages

• Engagement of employees

• Succession planning opportunities

• Risk management

Enterprise Management Incentives • UK’s most favoured share scheme

• Flexible individual options

• Share value agreed in advance

• Limit of £250,000 / £3 million (Consider DSPP as top-up plan)

• Qualifying criteria :

- Company : Trade, < 250 employees < £30m gross assets, group structure - Employee : Working time 25hrs / 75% - No material interest (30%)

EMI Tax Treatment

• No tax on grant • Any discount to MV is IT on exercise • Otherwise CGT

• Beware : Entrepreneurs’ Relief : Disqualifying events : EIS position

Timing…

65.8% or 10% tax regime

Other Considerations • Plan limits – top-up plans

• Non-employees – NED, consultant

Standard solution = USOP = high tax

Consider instead:

• Deferred Share Purchase Plan

Leavers • EMI options may lapse

• Good leavers:

- Illness, disability, transfer of employment, retirement, death, redundancy (?)

• For “bad” leavers:

- shares can be forfeit

- options may lapse

• Articles of Association & Shareholder Agreement

‘Shares for Rights’ New Concept: Owner-Employee Contract

Effective from April 2013 (subject to prior consultation which ended 8 Nov.)

Targeted particularly at smaller fast-growth enterprises but businesses of any size would be able to

adopt this new arrangement

Employees sacrifice some of their basic UK employment rights in return for a CGT exempt award of shares

The rights to be exchanged relate to redundancy, the right to request flexible working, time off for training, unfair dismissal, as well as a doubling of the notice of return to work from maternity (cannot waive discrimination rights)

In exchange they can be awarded £2,000 - £50,000 of ownership (shares) in their employer

business. These shares will be exempt from CGT but NOT Income Tax or National Insurance

Contributions.

Employee Communications

• Explanatory literature

• Scheme presentations – pre and post awards

• Email and telephone helpline

• Employee tax support

• Intranet and website

Complete Solutions Scheme design/health check Documentation Trustee services Share capital structure Valuation Resolutions and minutes Employee communications Administration, compliance

Plan Administrators – Why? • Ensure an audit trail of all actions, timely completion and on-going

compliance; • Generate comprehensive reports of plan benefits by company and

employee; • Validate all awards and exercise events; • Track all leavers and joiners; • Manage document production; • Calculate taxable amounts in relation to transactions, ready for

submission to the company’s internal or external PAYE facility; • Generate plan returns, trustee self-assessment returns and trust

accounts where applicable. • Employees and employers are able to access data and make plan

choices on the system via a bespoke plan website.

Thank You