Share options: Burden or benefit?
We have seen many companies offer share options to their UK employees without considering the UK tax implications.
Many tech companies currently offer benefits to their employees outside the typical salary and bonus structure. One of the more popular options across the US and Canada is stock and share options for employees. But how does this translate when companies want to offer similar incentives in the UK?
For UK employees and their employer to minimise the UK tax on share options, the UK tax authorities need to provide ‘authorisation’ that the scheme meets certain criteria.
How companies can take advantage of tax efficient share options plans in the UK
One of the most widely used tax efficient share option plans in the UK is the EMI (Enterprise Management Incentive). This is aimed at growth companies to help them recruit and retain employees. Tax reliefs are generous:
- No income tax on grant of the options
- No income tax on exercise, provided the options are not granted at a discount and is exercised within ten years of grant
- Capital gains tax rate of 10% on the sale of the shares providing the option was granted at least 12 months before exercise.
To be able to grant options over its shares under an EMI arrangement, a number of conditions must be met, including having a UK permanent establishment. So a US-based company with a UK subsidiary may qualify, provided the other conditions are met.
Internationally mobile employees
When employees move countries for their employment then further tax considerations are required. For example, a UK employee granted EMI options would continue to benefit from the UK tax efficiencies even if they moved to the US to work for the parent company. However, the US would also have taxing rights on exercise of the options.
An EMI option is only efficient for UK tax purposes; the option would not have any special tax status in the US. Consequently, any increase in value of the shares the option is over, between grant and exercise, would be taxable as compensation, apportioned for time spent working in the US.
Similarly, a US employee granted a US tax qualified option, who moves to the UK before exercise, would still qualify for the US tax benefits. However, the UK would tax any increase in value of the shares the option is over between grant and exercise as income, apportioned for time spent working in the UK. The tax may be collected through payroll or the employee’s self assessment tax return, depending on the facts and circumstances. If collected through payroll, National Insurance contributions may also be due.
As you start to think about hiring your first employee in the UK, it is important to consider what type of benefits you wish to offer your employees, and whether share options are the best for you and your employees.