Bernhard Gilbey, Squire Patton Boggs David Piesing, Praxis IFM

1. INCENTIVISING KEY PERSONNEL
Bernhard Gilbey
Head of Tax Strategy & Benefits, Squire Patton Boggs
David Piesing
Director, Head of Wealth Structuring, PraxisIFM Trust
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2. UK Government sponsored
employee incentive arrangements
Tax Advantages Conditions Limits
Enterprise Management
Incentives
No tax/NIC on grant
If M.V. option no tax/NIC
on exercise
ER if held ˃ 1 year
Qualifying Trading
company
˂ 30m gross assets
˂ 250 employees
Working time
requirement
£250k per individual
(M.V. at date of grant)
£3m for all EMI options
Employee shareholders No IT/NIC on first £2,000
No CGT on sale
Required to give up
employment rights
Between £2,000 and
£50,000 of value at issue
N.B. the employee can’t
pay for the shares
Company Share
Ownership Plan
No IT/NIC on grant
No IT/NIC on exercise
Requirement to hold
option for three years to
gain tax advantages
£30,000 (M.V. at date of
grant)
NB All employee plans – SAYE, SIPs
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3. Non-government sponsored
arrangements
Growth shares - shareholders become entitled to value
above hurdle (usually a little higher
than current market value)
JSOP - joint ownership of a single share so
that trust has beneficial interest in
current market value and employee
has beneficial interest in future growth
Question for David – What and where would you see the
advantages or requirements for an EBT?
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4. Succession planning with EBTs
• An EBT can act as a “warehouse” to acquire shares from
a retiring or deceased shareholder, thereby avoiding the
need for a forced sale of the company to realise liquidity.
The EBT can borrow to buy shares and repay
borrowings out of dividends.
• An EBT can play an integral role in facilitating a sale to
management when there is not an attractive trade sale
or private equity sale option. The company’s founder
may well prefer to sell to management but it needs to be
affordable to the purchasers. Dividends flow to the EBT
and the vendor is paid out of profits over time.
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5. Succession planning with EBTs (cont.)
• UK company law expressly allows EBTs to be funded by
loans or gifts from the employer company without
contravening “financial assistance” rules re the purchase
of a company’s own shares.
• Quite recently-introduced “Employee Ownership Trusts”
actively encourage sales of controlling interests in
companies to such trusts. There is an unlimited CGT
exemption on the sale of the shares to the EOT for the
vendor if certain conditions are met (and as an added
advantage the employer company can pay tax-free
bonuses of up to £3,600 per employee per annum if
owned by an EOT).
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6. Incentive Planning using EBTs
• EBTs can be used to “lock in” key employees. The EBT
can award them conditional bonuses and “ringfence” the
funds for that employee, who needs to continue in
service for the stipulated period (say 2 years) in order to
receive the bonus. If he leaves or is sacked before then,
he sacrifices the conditional bonus. By ringfencing the
conditional bonuses in the EBT the bonus pot is
protected for the employee from the company’s
creditors.
• A fixed % of profits could be allocated to an EBT each
year, out of which conditional bonuses can be allocated.
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7. Other common uses of EBTs
• EBTs, often established offshore to avoid CGT on capital
gains arising from share value growth while held in trust,
are very commonly used as the “warehouse” to ensure
that awards granted under the many types of share
scheme can be satisfied without the need to further
dilute shareholdings.
• Offshore rather than onshore EBTs are also especially
useful when employees/beneficiaries are resident in
multiple jurisdictions, in order to avoid third country tax
leakage.
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8. Incentive package flexibility provided by EBTs
• The availability of EBTs enables companies to choose
the best incentive package for their circumstances (EMI,
ESS, CSOP, Growth Shares, JSOPs) and ensure they
have a mechanism for:
– Recovering shares if an employee leaves
– Providing a market (and therefore liquidity) to avoid options
expiring
– Efficient recycling of shares (and minimising dilution)
– Warehousing shares to enable JSOPs
No wonder David is so busy……
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