Granting share options to key people?

54and56

If a company is struggling to attract and retain key people due to upward pressure on salaries etc could it grant a share option to a key person which would only attract a tax liability down the road if the option results in a gain e.g. the business has 100 ordinary shares today owned by the MD and its market value is €1m. The MDr identifies a key person he wants to lock into the business (could be a PAYE employee or an external adviser such as a non exec director) so he grants them an option to purchase 5 new ordinary shares (to be issued by the company rather than taken from his 100 existing shares) for €1.

In theory the 5 new shares are worth €47,619 day one (€1m / 105 X 5) and three years later the company sells for €5m producing a gain of €238,094 (€5m / 105 X 5 - €1) for the recipient of the option on which he/she would pay 33% CGT.

Is the above legit?

Peregrinus

The structure is legitimate in the sense that its not unlawful, but the tax outcome is not as you suggest. There are special rules for the taxation of share options granted in connection with employment. The rules are complex depending on when the option is excerisable - if it can be exercised more than seven years after the date of grant, then the value of the option is taxed (as income, not as a capital gain) on the date of grant, plus a further tax (again, income tax) on additional value at the date of exercise. If the option can only be exercised within seven years of grant, then there's no tax on grant; there's tax on exercise but, again, it's income tax, not CGT.

It used to be possible to set up employee share option schemes which got revenue approval which qualified them for much more favourable tax treatment, but the terms and conditions of approval were quite strict. For one thing, they had to be all-employee schemes; you couldn't offer them only to a few senior "key people". But I think this arrangement was closed off a few years ago. You can continue to operate scheme which were approved in the past and which still have outstanding options, but you won't get favourable tax treatment for any new options granted at this point, even under an approved scheme.

As I say, this is a complex area and the possible permutations and combinations are considerable, so it might be worth exploring. But you really do need expert professional advice to steer you through the thicket.