Legal update: Employee share schemes

Published: Monday 1 August 2022

If you operate through a limited company and wish to incentivise your employees by giving them a stake in your firm, but decide that full employee ownership is not for you, what other options do you have?

There are many different ways to incorporate employee ownership into a business, including share options and share awards, and within these categories many different share scheme approaches are possible. Some share schemes are ‘approved’ by HMRC, meaning they carry certain tax advantages provided a number of
qualifying conditions are satisfied.

You may have read about popular approved employee share schemes such as Enterprise Management Incentives (EMI), Share Incentive Plans (SIP) and Save As You Earn (SAYE) schemes. Unfortunately, they are generally not available to, or suitable for, law firms as legal services are specifically excluded from the list of qualifying business activities for an EMI scheme, and both SIP and SAYE schemes must be offered to all employees.

Arrangements that are available to limited company law firms include the following:

Growth shares

Growth shares allow employees to participate in the future growth of the firm. The employees are awarded the shares from the outset but will only benefit from a future disposal of the shares if a certain financial hurdle is reached. Law firm owners have the flexibility to set the participation hurdle over which the employee
starts to benefit.

When they are issued, the value of growth shares is usually quite low, so that they can be bought at modest cost and without triggering any significant tax liability. Any future growth in value is charged to capital gains tax when the shares are sold. This compares favourably to bonus arrangements based on
future performance, which would usually be taxed at income tax rates of 40% or 45%.

Company share option plan (CSOP)

This is an approved share option scheme, under which tax-advantaged share options with a maximum value of £30,000 per individual may be granted to selected key employees/directors. Usually, there is no tax or national insurance payable on the grant of the share option, nor on any increase in share value when the option is exercised, provided the options are exercised between three and 10 years after the date of the grant.

In recent years, we have seen a gradual increase in the number of firms offering growth shares to key employees and, so far, very few firms have explored the
CSOP option. One possible reason for the low take up is that, ultimately, both arrangements only work if shareholders are able to sell their shares on, and this usually requires a firm to be sold in its entirety - either to another firm, a private equity investor or by listing on the stock market.

If you would like any further information on how an employee ownership structure could work for you, please get in touch.

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Jon Cartwright
Jon Cartwright
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Patricia Kinahan
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Andy Harris
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