What To Do If EMI Is Not Available

What to do if EMI is
not available…
Amanda Flint

Contact:
T: 07786 967577
E: What to do if EMI is not available.ppt or from 1st July2012 amanda.flint@uk.gt.com
af@amandaflint.com

EMI is not available…
 This may be because:
 Your Company does not qualify (this might be
because your trade does not qualify; or
 The individual that you want to benefit does not
qualify e.g. not working enough hours; or
 Your shares do not qualify; or
 You have too many employees.
 You can use EMI but you have no more capacity
(now personal limit of £250k per person –
measured at grant)

Tel: 07786 967 577 E: af@amandaflint.com
2

First step: go back to your
objectives
“We want our directors to “I want
“The executives should demonstrate commitment by executives
be treated as investors – ‘pay to play’ but we understand to
we would like them to put that they are at a stage in their participate
up cash into the lives where they are cash poor!” in a future
company”
exit – but
“We know that our “I am keeping a tight control on not until
management team is cash and so it is important that then”
key to our future the directors have a meaningful
success and we want long-term incentive”
them to share in the
growth it has created” “Achieving capital gains tax treatment
is an important financial element of the
incentive for executives.”

3

Ask some questions:
 Valuation is key – don’t forget the minority share holder
discount!
 What is the realisation point – exit? Or earlier? Who will
fund an earlier exit?
 What do you want to happen if a participant leaves?
 Will there be future generations of executive to
participate in the incentive – Or are you mainly focused
on the current executives?
 Are you prepared to make the incentive valuable from
the outset?

4

Solution 1 –share subscription
Objectives:
 Executive – little cash COMPANY
 Pay subscription price of
nominal value
Shares Cash
 Get shares up front –
benefit from future growth
 Can add conditions to
EXECUTIVE
shares – forfeit if leave
employment
 Need tax election
5

Implications & Use – share
subscription
Impact Useful where:
Any difference between nominal The value (for tax purposes!) is
value & market value is subject to very low – it will not have NO
income tax; value;
Often no PAYE/NIC – but The nominal value of the shares
depends on circumstances; is low;
No advance valuation can be You want the executive to be a
agreed with HMRC & may have to shareholder;
wait until self assessment tax The implications if they leave are
return is submitted
well thought through – i.e. who
Executive is a shareholder
will buy the shares, at what price

6

Points to note – share
subscription
 Probably helpful to undertake a valuation
exercise at acquisition – HMRC tend to use
hindsight!
 Limited shelf life – as the company grows,
shares will become more valuable & entry cost
will become unattractive
 Uncertainty of tax treatment will not suit very
cautious executive
 But: part of shareholder ‘team’ from the outset
7

Solution 2 – partly paid shares
Objectives:
 Executive – little cash COMPANY
 Acquire shares at current
market value – but leave
subscription outstanding Shares Owes
 Get shares up front – benefit subscription
from future growth price
 Can add conditions to shares –
EXECUTIVE
forfeit if leave employment
 Tax election prudent

8

Implications & Use – partly paid
shares
You want the executive to buy
No up front acquisition cost;
shares at market value but they
No up front income tax charge –
have no cash available;
but may be on going tax The exposure level is acceptable
No advance valuation can be
You want the executive to be ‘on
agreed with HMRC – may need
risk’ – pain as well as gain!
adjuster clause
There is an exit likely at some
Shares subject to a call – tax
point
due if disposed of without paying
The implications if they leave are
up
Executive is on risk for an
well thought through – i.e. who
will buy the shares, at what price
amount equal to market value on
Tel:acquisition
07786 967 577 E: af@amandaflint.com
9

Points to note – partly paid
shares
 Probably helpful to undertake a valuation exercise at
acquisition – HMRC tend to use hindsight!
 Can use an Employee Share Trust to buy shares later if
necessary
 Recent tax changes mean that now need to use new
issue shares only
 Very difficult to unscramble – tax cost of exit even if
value falls

10

Solution 3 – loan to buy shares
Objectives:
 Executive – little cash
 Acquire shares at current COMPANY
market value
 Get shares up front – benefit
from future growth
Cash Cash
 Can add conditions to shares – Shares
forfeit if leave employment
 Tax election prudent
EXECUTIVE

11

Implications & Use – loan to buy
shares
Sameas partly paid but:
Same as partly paid but:
 Where you might want to
 Not subject to a call on
release executive from
shares
obligations in certain
 Easier to write off loan if
circumstances (e.g.
you wish to do so in the hardship, extreme
future economic conditions,
death)

12

Points to note – loan to buy
shares
 Same as partly paid but:
 Recent tax changes mean that loan should not come
from a third party unless it is a commercial loan
 Easier to write off loan – so long as this is lawful for
insolvency law purposes

13

Solution 4 – flowering shares
Unrestricted
Objectives: share value
 Executive – receives shares
up front whose value
‘Flowering’
‘blossoms’ if conditions are
share value
met;
 If conditions are met –
restrictions fall away;
 Can be forfeited if leaves
employment etc.
EXECUTIVE

Pays subscription
price & receives
shares 14

Implications & Use – flowering
shares
Impact
Tax trap: If you don’t pay the full TAX TRAP
unrestricted share value when you
acquire the shares, there will be Unrestricted
share value
income tax to pay when you sell
them ‘Flowering’
 Can make election and pay
share value
income tax up front on value
you may not receive; OR Pays
 You can pay income tax unrestricted
when you dispose of the share value
shares – value could be much or ‘Flowering’
EXECUTIVE share value
higher
15

Points to note – flowering
shares
 Still useful if tax is not the main issue
 Need to manage expectations & communicate
regularly and clearly on the tax treatment
 May be helpful where share value is low and
entry cost is also low
 Can combine with loan

16

Solution 5 – growth shares
Ordinary share capital Ordinary share capital
Growth shares
EXECUTIVE

Growth shares created

Objectives:
 Executive – receives shares from a new class that only has
value if company value grows
 Value low – whether or not restricted (may be hurdle);
 Can be forfeited if leaves employment etc. – will need to use
tax election on acquisition for tax benefits

17

Implications & Use – growth
shares
The current share value is high
New class of shares – amend
but you want to reward executives
articles of association;
for future performance;
No advance valuation process
You want executives to become
with HMRC but a valuation
shareholders from the outset;
exercise advisable – may be able
There is a change of ‘generation’
to agree with HMRC afterwards;
Executive a shareholder from
at the company
the outset

18

Points to note – growth shares
 The new class of shares and the corresponding low
value has a short shelf life – especially in a fast growing
company;
 If you will have a train of new joiners over the next few
years – you may need to create a new class of shares
periodically – which may mean a very complicated share
capital structure;
 This could make communications on value opaque and
might also make an exit complicated

19

Solution 6 – joint ownership
Ordinary share – Ordinary share –
current value future value

EXECUTIVE
Trustee

Objectives:
 Executive – receives future growth on existing ordinary shares
 Value low – whether or not restricted (may be hurdle);
 Can be forfeited if leaves employment etc.

20

Solution 6 – joint ownership –
additional feature
Ordinary share – Ordinary share –
current value future value

Trustee Unapproved option EXECUTIVE

Objectives:
 Unapproved option over existing value to executive;
 Subject to income tax on exercise – but value fixed at award;
 On vesting, executive gets ‘whole’ value of share – initial
value subject to income tax, growth subject to capital gains tax
– similar to LTIP

21

Implications & Use – joint
ownership shares
The current share value is high
No need for a new class of
but you want to reward executives
shares – keeps share capital
for future performance;
structure simple;
You want executives to become
Can adjust hurdle to regulate up
shareholders from the outset;
front cost
It is likely that you will have a
No advance valuation process
number of senior hires over the
with HMRC but a valuation
next few years
exercise advisable – may be able
to agree with HMRC afterwards;
Executive a shareholder from
the outset
22

Points to note – joint ownership
shares
 Simplicity of share capital structure attractive if there is to
be a later exit;
 Not time sensitive – can adjust as time progresses;
 Use of trustee adds third party validity to the
arrangement;
 Up front tax charge unless pay market value for future
interest of shares;
 Valuation exercise strongly recommended

23

Summary
 There WILL be tax implications – and these cannot be
left to the individual as the company will have liabilities –
advice is essential
 Don’t forget compliance issues for the company – non-
reporting implications can be a high corporate cost!
 Any non-UK element will need additional tax & legal
consideration
 Up front planning and on-going communication to
executives are EQUALLY important

24

What To Do If EMI Is Not Available

More Related Content

What's hot

Viewers also liked

Similar to What To Do If EMI Is Not Available

What To Do If EMI Is Not Available