Share Options (or Stock Options)
Share options can provide a strong incentive, particularly where there is a good chance of significant growth in the share price.
Under a typical Share Option Plan, an employee is granted an option to acquire a specified number of shares, after a period of time, say, three years later at the share price at the date of grant. The employee can therefore make a gain on exercising the option which is equivalent to the increase in the value of the shares.
The exercise of unapproved share options are subject to income tax and (usually) national insurance contributions (NICs) on the gain at the exercise date.
Enterprise Management Incentives (EMI)
A highly tax-effective method of rewarding executives and other employees in smaller companies. Options can be granted over up to £250,000 worth of shares to each individual subject to a £3 million overall limit. As long as the exercise price of the option represents the market value of the shares on the grant date, any increase in the share price after the grant date is exempt from income tax and NICs. A gain on the disposal of shares acquired by exercising the option should be subject to capital gains tax (CGT) at the lower rate of 10% for the first £1 million of lifetime gains. EMI is only available for companies with gross assets up to £30 million and with fewer than 250 employees. It cannot be used by companies in certain sectors, such as land dealing, farming, leasing, banking, ship building and coal and steel production.
Company Share Option Plans (CSOPs)
A CSOP is a tax-efficient share option scheme, which allow options to be granted over shares worth up to £30,000 to each individual. There are no income tax or NICs charges on the exercise of a CSOP option if the option is exercised at least three years after the grant date (or earlier, in certain specified circumstances). A gain on the disposal of shares acquired by exercising the option will be subject to capital gains tax (CGT) . Given their flexibility and tax advantages, CSOPs are frequently used for rewarding middle management and employees generally especially where EMI options are not available.
Nil-Cost and Nominal-Cost Options
While traditionally the exercise price of an option has been the same as the share price at the grant date, some companies have granted Nil-Cost Options (with a zero exercise price) or Nominal-Cost Options (with the exercise price equal to the par value of a share) as an alternative to Performance Share awards. These can give employees more choice about the time when the option is exercised and, therefore, when the income tax charge is triggered.
Share (Stock) Appreciation Rights (SARs)
These provide a similar reward to share options. However, on exercise the employee does not pay any exercise price but receives an amount equivalent to the gain, either in shares or in cash. Fewer shares need to be issued, which can help companies to keep within investors’ share dilution limits.
Again, these are similar to ‘real’ unapproved share options but deliver the gain in cash. They can be particularly useful where shares are not available. The ‘share price’ may be based on a formula linked to profits or other key performance measures.
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