Business owners will well know that replacing staff is expensive and that it is far better to retain them where possible. Many businesses that have got through the recession are now looking at ways of rewarding the staff that have supported them – the problem is that the cash isn’t available.

An attractive non-cash alternative is to reward employees by granting them share options. Small companies often think that share options are too complicated for them, so this is the reason that the Government introduced the EMI scheme.

Share options can be a real incentive to the key people of a business, it can really help where a business is looking to grow. Once an EMI scheme has been set up it can then be used to attract the best candidates. This can be a real help where employers are struggling to fill vacancies.

EMI works by a company granting share options to an employee. These options are converted into shares at some defined point in the future; this could be on the sale of the company, after a specified time period or the achievement of certain performance targets.
The employee then has the opportunity to purchase the shares at a price that is set at the market value of the shares at the time that the shares options are granted. The market value rule is an important requirement of the scheme and the value needs to be agreed with HMRC at the outset.

When the shares are exercised no income tax or national insurance is due, this compares with unapproved share options where PAYE would be due on the market value less the purchase cost of the shares.

For CGT, if the shares are sold within a year of being issued a tax charge at either 18% or 28% will be due. This reduces to 10% after a year. This could be a downside if it is intended that the options are exercised just before a sale. This is why most options now are exercised after a set period of time or a target has been met – both are real incentives for the employee.

• Year end tax planning