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Equity Linked Reward – the time is now!

There is a war on talent and most businesses in Northern Ireland are experiencing challenges in recruiting and retaining the best and the brightest employees.

The Northern Ireland Labour Market Report December 2018 states that employee jobs have seen consistent growth since December 2015, with consistently low unemployment levels being recorded since November 2017 with the NI rate currently at 3.9%.  These employment statistics are against a backdrop of modest rates of economic growth and explain why recruiters are struggling to find candidates.

The costs of replacing an employee can be as much as £30,000 according to a report by Oxford Economics, so it’s imperative for businesses to engage and retain these candidates once they have gone through the competitive process of hiring them. Ensuring that employees remain highly engaged is also good for business as confirmed within a report commissioned by the UK government on employee engagement which identified a direct link with business performance.

Equity reward is one such tool available to employers and we have helped an increasing number of businesses use this as part of their remuneration strategy.  What is meant by ‘equity reward’? Broadly, it is a mechanism for an employee to benefit from the increase in the value of a business and/or a business sale. These plans can target specific employees or can be made available to all workers.

The shares can be of a different class to those of the ordinary shareholders, and once minority discounts are accounted for, can typically be acquired by the employees at a low market value.  This keeps potential income tax charges at a minimum and future growth in the value may be subject to more favourable capital gains tax rates at 20% or where the conditions for entrepreneurs relief are satisfied, as low as 10%.

There are also HMRC approved share option plans that can be used such as an Enterprise Management Incentive Plan (‘EMI’) or Company Share Option Plan (‘CSOP’). Both income tax and capital gains tax advantages may be available, allowing employees to essentially acquire discounted shares free from income tax.  They could also benefit from a relaxation of the conditions required for 10% capital gains tax rate on any gains arising from subsequently disposing of the shares. A key feature of share option plans is that employees will not actually own any shares now, only a right to acquire shares at a future date – often only when the company is sold.

The tax savings are clear, the benefits to both employees and employers and clear and engaging employees in this way is attractive to both parties in many ways.