How to give share options to your overseas employees
Want to reward your overseas employees with share options but don’t know how? We explain how UK companies can give share...
It might sound like you’re slipping someone share certificates under the table, but there’s nothing underhanded about Unapproved share options. In fact, they’re often the best way to grant equity to your non UK-based employees and anyone else who doesn’t qualify for the EMI scheme.
In this post, we cover exactly what an Unapproved share option scheme is, the tax you need to know about and how to get started with a scheme of your own.
A share option scheme is a structured way to distribute share options to members of your team, like employees, advisors, freelancers and consultants.
Options give the holder the opportunity to buy shares in the future at a pre-agreed price. Later they can sell the shares at the higher value and directly profit from the company’s growth and success.
Our Shares vs options article explains why it’s often better for companies to grant share options, rather than straight shares. In short, the various rules you can attach to the option grant help protect your company and equity over the long term.
See Share options explained for more general detail about the benefits of share options schemes for attracting and retaining your team.
The name ‘Unapproved’ can sound unappealing. And confusing – if you as the founder are taking the time to set up the scheme and define its rules, how can it be unapproved?
Unapproved is a niche term that simply means that it’s not part of the UK government’s ‘approved’ employee share schemes. Approved schemes come with a generous set of tax perks – both for the company granting the shares or share options, and the employee receiving them. The Enterprise Management Incentive scheme (EMI) is the one that’s most relevant to UK startups.
But only certain companies, and specific team members, qualify for the government-backed schemes. If you don’t meet the EMI criteria then your share options can be granted under a non tax-advantaged scheme (ie, Unapproved).
Keep talent onboard and engaged for your startup’s journey. On SeedLegals, it’s easy to create and manage an employee share option scheme tailored to your business.Set up your scheme
There are still plenty of advantages to granting share options under a non-tax advantaged scheme. Not least, that setting up an Unapproved scheme is much more flexible and allows you to extend options to more people than you can under the EMI scheme.
Below are the most common reasons you’ll find yourself needing an Unapproved option scheme.
The EMI scheme is designed for UK-based employees on your PAYE payroll. If you want to grant options to overseas employees, you’ll need to set up an Unapproved option scheme for them.
When your Unapproved option scheme is set up, you can create option grant agreements for your team. The agreement is an English-language document, and the relationship between your company and the option holder will be covered by English law. The agreement covers scenarios where the employee is not a UK taxpayer so there’s no need to make any adjustments to the wording or the scheme rules.
CEO & Co-Founder,
Want to grant options to team members in the US or France? Read more of Anthony’s insights in How to give share options to your overseas employees.
The EMI scheme is also unavailable to anyone who doesn’t appear on your PAYE payroll. That includes people you work with on a temporary basis, like independent contractors and advisors.
It’s easy to include these team members with an Unapproved scheme, since you’re in total control of the grant and vesting rules, and the exercise price.
The EMI is designed for small to mid-size independent companies.
If you …
… then your business won’t qualify for the EMI scheme. You can see a complete list of the rules and conditions in the HMRC manual.
Under EMI scheme rules, you can only grant options up to the value of £3M. After you’ve reached this limit, you can still grant options under an Unapproved scheme.
With an Unapproved scheme, there’s no special tax treatment for either your team member receiving the options or your company granting them – like there is with the EMI scheme.
As is usually the case with options in the UK, your team member doesn’t have any tax liability when they are granted their options. It’s only when they come to exercise their options and sell their shares that they’ll need to pay tax.
In the UK, Unapproved share options holders usually pay:
Remember that if your option holders are resident overseas, they’ll be subject to the tax laws of their own country and should get independent tax advice from a specialist.
Share options can be tricky for your team to understand. We’ve put together some information that explains how they work in Everything your employees need to know about their options. For specific tax advice, your team members should consult an independent tax advisor, who can help them understand the tax liabilities of their option allocation.
When an employee exercises their Unapproved share options, your company is liable for an Employer’s National Insurance Contribution (NIC) if the shares the employee acquires are a Readily Convertible Asset (RCA).
An RCA is a type of asset that’s treated as if it were cash for calculating income tax. The shares are only considered to be ‘readily convertible’ if your company is public, or about to be sold with an arrangement in place to buy the shares.
There’s good news: as the company awarding the options, you can offset the costs of the scheme against your Corporation Tax bill. If you’ve granted Unapproved share options to employees on your company payroll, you can claim a Corporation Tax deduction equal to the Income Tax Charge the option holder pays (the difference between the market value of the shares at exercise and what the employee pays for them).
Your company’s exact tax liability depends on how you structure your scheme and your team member’s role within the company. We recommend that you consult a specialist tax advisor as part of setting up your option scheme.
The EMI scheme is undeniably the most tax-efficient way for companies to grant options to full-time employees who are tax resident in the UK.
But the flexibility that Unapproved schemes give you has many advantages, such as:
Get the ultimate guide to share options. Learn how, why and when to grant share options in our free ebook.Download free ebook
We make it quick and easy to set up your Unapproved share option scheme – and you’ll have expert support to help you design your scheme and decide on the vesting and exercise rules you need.
Here’s how it works:
If you have any questions about the type of scheme that you need, or how to get started, book a slot with an options expert today. We’re happy to help!
gov.uk | Tax and employee share schemes | Accessed 30/01/2023
gov.uk | HMRC internal manual | Employee Tax Advantaged Share Scheme User Manual | Accessed 30/01/2023