Options or Shares – which should you choose?

Posted 05 Nov 2019 13:45 by RM2

When you’re setting up a share scheme for employees, one of the first questions you’ll want to ask is whether you should offer direct shares or share options.

What are the key differences between shares and options? A quick summary is set out below:

A Share gives employees a direct shareholding in the company with all the rights attaching to that share	An Option gives employees the right – but not the obligation – to buy a share in the future, but at a price fixed today
May carry voting rights	No voting rights
May carry dividend rights	No dividend rights
Employees must usually pay market value for the shares, or suffer a tax charge on the value	No tax charge usually arises on the grant of an option. The employee will only pay the exercise price at a later date (and may choose never to exercise the option)
When the shares are sold, gains will usually be subject to capital gains tax	There may be an income tax on the exercise of the option, unless a tax advantaged scheme such as an Enterprise Management Incentive (EMI) is used
A private company should ensure there is a mechanism to buy shares back from departing employees – typically written into the company’s articles of association	If an employee leaves there is no requirement to buy shares back – the option can simply lapse

Whether or not an option or a share is appropriate will depend on the objectives of the share scheme and, in many cases, the employees themselves. It may not be particularly motivational for lower paid or junior employees to pay “up front” to acquire a share, and unless dividends are likely to be significant it may not be very attractive even for more senior employees.
Nonetheless, paying something to acquire shares may demonstrate a real commitment to the business, and some companies prefer senior managers to have some “skin in the game”.

It is worth noting that whether your employees are awarded shares or options, the company must make an annual share plan return via HMRC’s employment related securities website.

For more guidance on the best share plan for you and your employees, contact us on 0208 949 5522 or email on enquiries@rm2.co.uk

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