Last updated: 1 October 2024.
Many UK-based businesses work with employees and contractors not based in the UK. Even with the rising number of distributed teams, remote workers and digital nomads, that's really nothing new.
Let's say you're one of those very business owners. And you want to incentivise and reward all those who make a difference, advisors, contractors and employees alike - with equity - regardless of where they're based.
We hear you. And good for you! Well, you'll be pleased to know that it's totally possible.
But before you do anything, you've got to do your due diligence. After all, laws and regulations vary from country to country. If you're ever unsure, ask your lawyer or accountant.
In this article, we'll explore two great ways to reward employees overseas with equity, plus what to watch out for to help you minimise the risk of getting it wrong and maximise the benefits that arise when your teams own a piece of the pie!
Let's get to it.
The Enterprise Management Incentive scheme (EMI) is a popular choice because of its impressive tax benefits, but only UK-based employees (on the payroll) are eligible.
Is your company eligible for EMI? Take our two-minute quiz to find out!
But that's not the only option scheme potentially available to you. Say hello to unapproved options.
The word ‘unapproved’ may cause confusion but don't let that put you off. All it means is that you don't have to get the nod from HMRC to set up the options scheme. For that reason, we call it ‘unapproved’.
However, it does mean that there aren’t any tax advantages. But what it lacks in tax efficiency, it more than makes up for in flexibility.
With unapproved options, you can reward your overseas employers and anyone who isn’t enrolled on the PAYE, such as contractors in the UK and consultants, or even businesses.
And you can do the same with growth shares. Speaking of...
Growth shares can be issued to all types of employees and non-employees, such as accountants, advisors, businesses, contractors and consultants.
Like unapproved options, growth shares are flexible too and there are no specific limits or statutory requirements you need to follow.
As you can reward so many different people with growth shares, let's call them 'recipients' from here on out.
Growth shares are issued at a hurdle rate, meaning that a recipient only shares in the capital growth of the business, from the point the shares are issued, not the company’s inception.
In other words, if you give a person growth shares, you're rewarding them for the value they bring - not for the hard work that others may have put in before that person even joined (or started working with) your company.
For example, if the current share price is £2 per share, growth shares will be issued with a 'hurdle rate' set at a small premium, say £2.40*. Recipients will share in any net sale proceeds that are over and above £2.40 per share.
*Small premium above today’s value (typically between 10-40%) 20% in this example.
What's more, in the UK, they face no Income Tax implications, as growth shares are worthless at the time of issue. And if they sell the shares later, they only pay Capital Gains Tax on the difference between the hurdle and the eventual sale price.
You can see how growth shares are useful for UK-based employees, overseas employees, and non-employees. But there's more...
Both unapproved option schemes and growth share schemes can be conditional. That means that you can set specific goals that recipients have to meet in order to unlock their equity.
Conditions can be performance-based milestones or time-based e.g. stay with the company for a set amount of time.
Now, this isn't about catching people out, it's about providing equity rewards that reflect people's actual contributions.
Conditional share schemes act as a long-term incentive. One that aligns people (no matter where they are) and boosts retention all while protecting existing shareholders' interests.
All conditions should be measurable, tangible and specific, agreed upon by all parties and laid out clearly in the shareholder's agreement.
Download our free Conditional Equity Milestones guide for inspiration.
Tax consequences will always depend on the jurisdiction of the recipients and can vary widely.
Your company may have to pay tax and national insurance in the UK for options granted to overseas employees. HMRC has outlined a few examples, but again it’s a good idea to speak to an accountant to get advice on this.
Be sure to talk with the intended recipient and assess their understanding of tax implications in their local country before you issue any shares or award any options.
Advise them to check with an accountant what they need to do in terms of reporting share options, as again, this varies from country to country.
Some companies choose to take tax advice for the jurisdiction where they have overseas employees, and adopt our unapproved options agreement template but then pass it on to their lawyers to tweak it for that specific jurisdiction.
Yes. Many of our customers reward folk outside of the UK with growth shares and/or unapproved options but have an EMI scheme for their UK-based team.
If you're a UK company and want to award stock options to US taxpayers, you'll need a 409A valuation. If that's the case, you can get a 409A valuation from us for a small fee.
So there you have it, equity rewards not held back by borders!
You could ask your accountant and solicitor to set up and manage a share scheme for you, but this could cost a pretty penny and may take a long time.
Not only that, but one of the key benefits of a share scheme is that it aligns, incentivises and motivates teams to do their best work.
But without having somewhere recipients can go to view their shares and how they're vesting over time, that benefit can be lost.
That's why a platform that allows recipients to log on and see how their shares are doing via their own dashboard is so powerful.
Vestd supports EMI, growth shares, unapproved options and more.
We provide all the documents for a company to set up a new scheme, and we can also digitise existing documents so that future awards can be issued electronically.
Talk to one of our share scheme specialists today to find out more.
They'll give you all the information you need to know to help you make an informed decision about rewarding your key players, no matter where they are.