Share Plans Update: Incentivising Fintech Employees - The New opportunities

Many financial services companies do not currently satisfy the qualifying conditions to grant share options that attract beneficial tax treatment. Find out why, and what the solutions may be for your business.

Enterprise Management Incentive (“EMI”) legislation

Due to the “excluded activities” restriction in the EMI legislation, companies undertaking "banking, insurance, money-lending, debt-factoring, hire purchase financing or other financial activities", are unable to grant EMI options to their employees.

Company Share Option Plan (“CSOP”) legislation

The CSOP legislation currently restricts the shares over which CSOP options can be granted if the company has more than one class of share. The existing legislation means that if the company has more than one class of share, it can ONLY use the share class that either (a) gives the employees control of the company; or (b) is primarily owned by investors. This has been an issue for most fintech companies with investors.

The solution

Although almost everything from the Government’s 2022 Growth Plan has now been scrapped, one of the key changes which survived is the proposed changes to the CSOP legislation.

The changes, which take effect from 6 April 2023, substantially increase the number of companies that can implement a CSOP.

CSOP legislation changes

1. Increase the market value of shares that can be subject to a tax-efficient CSOP option at the date of grant (from £30,000 to £60,000); and
2. Relax the type of shares that can be used. This means the Board can use one of the company’s existing classes of share, or it can establish a new special class of share (such as sweet equity or growth shares), to grant CSOP options over.

These changes will benefit all companies, but particularly those in the fintech sector that are more likely to have multiple classes of shares in issue and, as a result, have been unable to operate either a CSOP (under the existing CSOP legislation) or an EMI scheme (due to the excluded activities outlined above).  

CSOP: The benefits

In short, the benefits of granting CSOP options, as opposed to an unapproved option, is that subject to meeting the statutory conditions:

1. No income tax or employees’ NIC will arise on the exercise of the CSOP option by UK resident employees;
2. No employer’s NIC will arise on the exercise of the CSOP option;
3. A full corporation tax deduction should be available to the employing company for the aggregate option gain made by all of the employees on the exercise of their CSOP options. Employees pay capital gains tax on the eventual sale of their shares on the amount by which their eventual sale proceeds exceed the exercise price they paid to acquire them.

This is a great time for fintech companies to review their existing incentive arrangements.

It is likely that many fintech companies will now, for the first time, be able to grant CSOP options over up to £60,000 worth of shares (at the date of grant) which can benefit from favourable CGT treatment.

It should be noted that the new £60,000 limit will normally apply after taking into account discounts of up to 75% to reflect the minority stake and non-marketability of the shares subject to the CSOP options. Therefore, the undiscounted market value of the shares subject to CSOP options could be up to £240,000.

Using CSOP options as opposed to a direct issue of growth shares or sweet equity avoids any commercial risk for the employees (for example, of a declining share price). It can also save the employee, and the employer a material amount of income tax and NIC as compared to unapproved options.

Please get in touch if you would like to understand how implementing a CSOP could help your fintech business lock-in, incentivise reward your key employees in a tax-efficient manner.