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

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