Share options will reward key worker

WS writes: My wife and I own 100% of the share capital of a small design company. We would like to extend the ownership of the company by selling 5% to one of our staff to motivate him and retain his services. He cannot afford to pay the market value for the shares. It has been suggested that we might give him some share options. Can you explain how these might work?

Answer

A share option is simply an opportunity to acquire shares in a company at a set point at an agreed price. There are two types of share options, Inland Revenue approved share-option schemes and unapproved schemes. Under a Revenue approved scheme the individual is granted a right to acquire shares at a price agreed with the Revenue´s shares valuation division. The individual is eligible to exercise his right between three and ten years from the date of the option. The scheme is restricted in that any individual cannot receive options that cover more than 10% of the shares in a company. Additionally there is a limit of £30,000 on the value of options granted to an individual. When the individual exercises the option he is issued with shares and no further liability to tax arises until he disposes of them, when he is assessed for capital gains tax. If the individual leaves before exercising his options, they lapse. The minimum period of three years is useful as it gives the employee an incentive to stay with the company and it also gives him time to save up money to buy the shares. An unapproved scheme works in the same way but is less tax-friendly, with income tax being paid on the difference between market value and exercise price at the time the option is exercised. These are typically used where the value of the options exceed £30,000 or where the rules of an approved scheme are too inflexible. There is one final point. The chancellor announced in the budget that he intends to introduce legislation that will encourage companies to share equity more widely among key staff. Details are due later this year and it may be worthwhile waiting before making a decision.