Employee Share Schemes

The main types of employee share scheme offered by David Craddock Consultancy Services are as follows:

A. The Government-Sponsored Schemes

I.
Tax-approved savings-related share option scheme
II.
Tax-approved executive/company share option scheme
III.
Tax-approved Share Incentive Scheme
IV.
Enterprise Management Incentives

B. The Traditional Tax-Unapproved Arrangements

I.
Tax-unapproved share option scheme
II.
Phantom share option scheme
III.
Long-term incentive plan
IV.
Share reclassification and purchase scheme

David Craddock Consultancy Services works with the client to develop the most appropriate scheme structure or, indeed, the most appropriate configuration of schemes if that is considered appropriate. It is sometimes the case that the scheme(s) work best when linked to an employee share trust. This is particularly relevant when succession planning or management buy-out arrangements are envisaged and it enables the sale of shares by existing shareholders under the capital gains tax regime.

The following provides a scheme synopsis for each of these schemes:


Tax-Approved Savings-Related Share Option Scheme
(An all-employee scheme)


The company grants share options to employees on an all-employee basis to purchase shares in the company at a discount of up to 20% of the market value of the shares at the time of grant. The employees save in order to build a fund that is available for the purchase of shares either 3 or 5 or 7 years later. The increase in value of the shares from date of grant to date of exercise is income tax-free. The International Savings-Related Share Option Scheme mirrors the U.K. version in its structure with tax reliefs around the world determined by their availability within individual country tax regimes.


Tax-Approved Executive/Company Share Option Scheme
(A discretionary scheme)


The company grants share options to selected employees to purchase shares in the company at market value at the time of grant. The employees can exercise their options between the third and the tenth anniversaries of the date of grant. The increase in the value of the shares from date of grant to date of exercise is income tax-free on the condition that the initial market value of the option does not exceed 30,000.


Tax-Approved Share Incentive Plan
(An all-employee scheme)


The company chooses which modules it wishes to introduce as follows:-


The Free Shares Module of the Tax-Approved Share Incentive Plan

The company supplies funds to a trust for the purchase of shares that are then allocated free to individual employee accounts. The beneficial ownership of the shares is vested in the individual employees. After 5 years the shares are transferred out of the trust to the individual employees, income tax-free.


The Partnership Shares Module of the Tax-Approved Share Incentive Plan

The employee supplies funds to a trust for the purchase of shares through a pre-tax salary deduction administered through the payroll. The employee enjoys beneficial ownership of the shares whilst they are held by the trust for a period of 5 years at the end of which they are transferred by the trust to the employee, income tax-free.


The Matching Shares Module of the Tax-Approved Share Incentive Plan

The company supplies funds to a trust for the purchase of shares that are matched on an agreed ratio that cannot exceed 2:1 to the shares that have been purchased by the employees under the partnership module.


Enterprise Management Incentives
(A discretionary scheme)


Under Enterprise Management Incentives, the qualifying company grants share options to selected employees to purchase shares in the company at a value which is not less than the nominal value of the shares. The employees can exercise their options up to the tenth anniversary of the date of grant. The increase in the value of the shares from the market value at date of grant to the market value at date of exercise is income tax-free on the condition that the initial market value of the underlying shares over which the option is granted does not exceed 120,000. Instead, the increase in value from the market value at the date of grant to the market value at the date of sale is subject to the less punitive capital gains tax regime.


Tax-Unapproved Share Option Scheme
(A discretionary scheme)


The structure of the Tax-Unapproved Share Option Scheme mirrors the approved executive/company share option scheme without the tax relief at date of exercise and there is no 30,000 limitation for the tax-unapproved version on the market value of the shares over which the option has been granted. It is possible to compensate for the absence of tax relief by granting the option at a discount. This feature may be viable in the private company but would be highly unlikely in the publicly-quoted company in view of the position taken by the institutional investment committees.


Phantom Share Option Scheme
(A discretionary scheme)


This is typically known as the Share Appreciation Rights Scheme. The scheme carries all the features of the real share option scheme with the exception that the employees do not actually take title to the shares. However, they have a right to benefit from the increase in the share value. The amount paid on the exercise of the phantom option comes out of company funds and is subject to PAYE and NICs. It is calculated by reference to the growth in the share price over the period of the option multiplied by a notional number of shares that has been agreed at the outset of the arrangement.


Long-Term Incentive Plan
(A discretionary scheme)


The company provides a cash contribution to a trust for the purchase of shares on behalf of employees who receive dividends payable on the shares. The shares are transferred from the trust to the employees at a later stage conditional on meeting appropriate performance requirements and/or staying with the company. This scheme usually operates as a high level executive scheme. Careful structuring is required to introduce tax-efficiencies and avoid tax-inefficiencies.


Share Reclassification and Share Purchase Scheme
(A discretionary scheme)


The company's existing ordinary share capital is reclassified into a combination of new preference shares and new ordinary shares. The existing shareholders then hold the preference shares which represent fully the existing value of the company at the time of the reclassification. The new ordinary shares are issued at very low value. The growth of the company from then on is represented in the value of these new ordinary shares that have the potential to rise in value considerably with the ongoing growth of the business. All future growth following the share reclassification attaches to the new ordinary shares. Typically, the existing shareholders, as well as owning 100% of the new preference shares will own, say, 80% to 90% of the new ordinary shares. The remainder of the new ordinary shares will be issued to the employees and all increase in value will be taxed under the more friendly capital gains tax regime.


Employee Share Ownership Plan Trust ("ESOT" or "ESOP")
(In conjunction with discretionary or all-employee schemes)


The ESOT or ESOP is a discretionary trust that has the power to borrow for purposes of investing in the company's shares and which uses one or more bona fide employee share schemes, whether tax-approved or not, to distribute to employees the shares that it has purchased. This arrangement offers considerable cash-efficient and tax-efficient advantages to the structuring of a company's employee share scheme.


Special Bespoke Employee Share Scheme Arrangements

Additionally, David Craddock Consultancy Services is able to construct, bespoke and refine other executive and/or employee share ownership arrangements that are created in response to client company needs where the objective is to mitigate income tax, PAYE and National Insurance Contributions and bring the tax treatment into the more friendly capital gains tax regime. Such an arrangement will typically evolve out of the consultation with the client.

sitemap