Planning for the future: share schemes for succession
Any diligent business owner will reach a point where they begin to plan for the future of their business without them. Some may choose to sell the business to an interested party in its entirety; however, there are several options whereby owners can help to retain their business’s independence by succession planning with their key talent.
The planning and allocation of the business’s shares amongst its employees is a popular option for SME’s, in particular, whereby owners can implement a scheme that will facilitate employees taking ownership of the company; this method is supported by the UK government as they believe that a rise in employee-owned enterprises will create further economic benefits in the longer term. Many studies carried out on Employee Ownership schemes have demonstrated the additional benefits of this kind of future planning in terms of increased loyalty, work ethics and motivation amongst employees who begin taking the steps to be instrumental in the success and profitability of the business going forward, knowing they will benefit as a direct result of their commitment. These Employee Ownership Trust (EOT) arrangements are relatively new, incorporated in the Finance Act 2014; however they are increasing in popularity alongside the traditional share ownership schemes: Employee Shareholder Status (ESS) and Enterprise Management Initiative (EMI).
Employee Shareholder Status (ESS) was introduced in September 2013 and enabled employers to offer tax-free shares, with a minimum value of £2,000, to their employees in a hand-off style agreement whereby the employee forfeits the right to redundancy payments, time off for study or flexible working or the right to appeal against unfair dismissal. These agreements can provide businesses with a tool to motivate employees to look to the longer term and allows companies to gift shares on a tax-advantaged basis.
The Enterprise Management Initiative (EMI) has tax advantages for employers as well, allowing them to offer tax efficient share options to their key employees. These initiatives are a popular, and workable, incentive for employers and employees alike; allowing employers to secure their business’s talent in a scheme which sees employees given the option to purchase shares at a later date for the present market value. Employers can develop schemes to incorporate performance and/or retention conditions and an employee’s participation can see them able to benefit from tax-advantaged share options with a market value of up to £250,000, subject to an overall company limit of £3 million.
How an employer chooses to plan for their succession is subjective; dependent on the short and long-term objectives and which schemes offer the best value for both parties but, it is increasingly apparent that a growing number of SME’s are keen to incentivise their key employees today to secure the business’s future for tomorrow.