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All you Need to Know About Share Option Schemes

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This article has been submitted by Greenaway Scott

A share option scheme is the right to buy a certain number of shares at a fixed price, at some point during the future. They are granted to employees who are able to exercise these options either after a certain time period, upon an exit event or when certain performance conditions are met.

Share option schemes have many benefits, for example they can attract, encourage and incentivise employees and increase competition with other employers.

There are 3 main types of share option scheme.

Enterprise Management Incentive (EMI)

This is the most popular type of share scheme. Under an EMI an application must be made to HMRC to approve the scheme in which a market value is agreed. 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 won’t pay income tax on the shares even if they are worth considerably more making this type of scheme very attractive to employees.

There are a number of conditions to be satisfied for the scheme to be approved by HMRC. The employee must work for the company for 25 hours or more a week, or if less, 75% of the employees working time and the employee must not own more than 30% of the share capital already. The company must also not control another company and cannot have gross assets of over £30 million.

The exercise price must be approved by HMRC for the employee to benefit from the tax benefit.

Save as you earn schemes

A save as you earn scheme allows the employee to save a fixed amount between £5 and £500 per month, for a period of 3, 5 or 7 years. At the start of the savings contract the employee is granted options at a discount of up to 20%. 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 a company share option plan, an employee is granted options of shares at market value. The options must be held for at least 3 years. There is no tax or national insurance 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. This can include a certain time period, for example the employee can exercise 10% of their share options after 1 year of employment, 20% after 2 years and then then remaining 70% after 3 years encouraging the employee to remain with the company.

There are also certain performance conditions, for example a condition that the employee/company must meet certain targets.

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 option when the company is being sold.