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July 17, 2017


A share option scheme is the right to buy a defined number of shares at a fixed price, at some point in the future. A share option scheme can be made available to employees and they are able to exercise these options either after a certain time period, upon an exit event or when certain performance conditions are met.

Benefits of a share option scheme include:

  • Attract, encourage and incentivise employees;
  • Increase competition with other employers; and
  • Maintain control and flexibility over the share options that are granted.

The main types of share option schemes are Enterprise Management Incentive schemes (EMIs), save as you earn schemes and company share option plans.

Enterprise Management Incentive (EMI)

This is the most common type of share scheme employers offer. The scheme can either be approved (by HMRC) or unapproved.

Having the scheme approved by HMRC allows the share options to be granted within tax benefits. An application must be made to HMRC to approve the scheme in which a market value is confirmed. This agreed market value then becomes the exercise price of the shares. If the employee pays the agreed market value when they exercise their options they do not pay income tax on the shares even if they are worth considerably more. This tax saving makes this type of scheme very attractive to employees.
There are a number of conditions in which the company and employee must satisfy for the scheme to be approved by HMRC. The employee must work for the company at least 25 hours a week, or if less, 75 percent of the employees working time and the employee must not own more than 30 percent of the share capital. The Company’s requirements are more extensive and include conditions such as they must not control another company and cannot have gross assets of more than £30m. There are also excluded industries including legal and accountancy services.

If the exercise price is not approved by HMRC then the employee will not benefit from the tax exception. The employee will be charged income tax on the exercise of the options.

Save as you earn schemes

This sort of scheme allows the employee to save a fixed amount between £5 and £500 per month, for a period of three, five or seven years. At the beginning of the savings agreement, the employee is granted options at a discount of up to 20 percent. At the end of the savings contract the employee can then use the money that they have saved to exercise their discounted options or if they decide not to they are repaid their savings in cash, tax-free.

Company share option plan

Under this kind of plan, an employee is granted options of shares at market value. The options must be held for a minimum of three years. There is no income tax or national insurance penalty payable on the gain made when the shares are exercised.

Exercise conditions

The company can require certain conditions to be met before the employee is able to exercise their options. As mentioned above this can include a certain time period, for example, the employee can exercise 10 percent of their share options after one year of employment, 20 percent after two years of employment and then the remaining 70 percent after three years of employment. This kind of restriction encourages the employee to stay with the company for a certain amount of time.

Another example of the type of conditions that must be met before exercise is performance. For example, the employee/company must meet certain targets. This incentivises the employee to meet the targets outlined.

The most common exercise condition is an exit event. An exit event can be defined as a share sale. This means that the employee can only exercise their shares when the company is being sold. The exercise of the share option happens on the day of completion and the employee then receives their share of the purchase price as they will be classed as a shareholder of the company.

The information contained in this article is for information purposes only and are not intended to constitute legal advice. If you require further information or advice in relation to any corporate matters please contact the Corporate team at Greenaway Scott. 

This article was first published on Insider Media on the 17th July 2017

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