Entrepreneurial businesses of all kinds have long relied on incentives as part of their recruitment and retention strategy. The EMI Scheme has proved an effective method for employee ownership and to reward eligible employees qualifying companies. Potentially avoiding income tax charges and delivering the much sought after “capital” return when the shares under the option are sold.
The problem for law firms, however, is that whilst they assist their clients to incentivise staff by the grant of EMI Options, their own businesses do not qualify for the grant of such Options.
With the expansion of the individual limits and relaxation on the limitations of the class of shares over which tax advantageous options may be granted, it is perhaps time for law firms to consider providing incentives to their employees by the grant of options under a CSOP (Company Share Option Plan) scheme.
While traditional law firms weren’t ‘exit’ driven, the trend is certainly changing and CSOP Options could be an important incentive tool to reward employees’ tax efficiently. Even if a law firm does not have an ‘exit’ strategy, it could still consider incentives by the grant of CSOP Options and provide tax efficient rewards.
CSOP
A Company Share Option Plan (“CSOP”) is a discretionary share option plan which allows an independent company to grant tax advantageous options to selected employees, over any class of non-redeemable ordinary shares up to a limit of shares worth £60,000.
No income tax or national insurance contributions (“NICs”) are payable on the grant of a CSOP option or when it is exercised, provided that the exercise date is between the third and tenth anniversaries of the date of grant. No income tax arises on an earlier exercise in certain “good leaver” circumstances.
On sale of the shares, there is potential capital gains tax (“CGT”) liability at 20% on the gain.
CSOP is suitable for which law firms
(a) Your law firm must be a limited company and not be under the control of another company.
(b) Your law firm wants to incentivise senior lawyers to feel like “partners” or part of the business.
(c) Your law firm wants to give them an incentive to drive the business forward to increase future value (whether or not a merger on sale is in the company’s future).
(d) Your law firm wants the flexibility to grant options to be held as long term capital incentives or to facilitate direct shareholding by exercising three years after grant, providing shareholder benefits such as dividends.
(e) Your law firm wants to grant incentives with no up-front “duty” tax charge.
Contact Winslows to find out how your law firm can get the edge in recruitment and retention with CSOP planning. Email info@winslows.co.uk
