Irish employee share option schemes

Crowe tax director Michael O’Scathaill contributed to this article by Eithne Dunne that appeared in The Sunday Times on 8 September 2019, outlining the detail around the different employee share schemes available.

Even if you’ve never had a notion of buying shares, you may be offered share options as part of your employment package. So what are they, how do they work, and are they worth it?

An employee share option is basically an agreement between you and your employer that you will be able to buy company shares at a certain price on a certain date. There are both “approved” and “unapproved” schemes; the former has Revenue’s seal of approval and comes with some degree of tax saving.

A share award is different to a share option, in that you get actual shares for free or for below market value, straightaway. In this case there is no tax benefit and you will be liable for income tax, PRSI and USC either on the full amount, if free, or on the discount you receive.

Approved share option schemes
There are three main types of share option schemes:

1. Approved profit sharing schemes (APSS)
2. Save as you earn (SAYE)
3. Key employee engagement programmes (KEEP)

The first is the most common in larger, listed companies, and allows your employer to give you up to €12,700 a year tax-free in share options — in lieu of a bonus, which would be taxed as normal.

You would still pay USC and PRSI, which could be up to 12%. The options remain in trust for three years, at the end of which they are vested, meaning they are yours. You can sell whenever you like; any profit will be subject to capital gains tax (CGT) at 33%.

SAYE schemes, as their name suggests, start out as savings accounts into which employees can save between €12 and €500 a month, after which they pay tax. The schemes may last three, five or seven years. At the end of the period, the employee can use the money to buy shares at a pre-agreed price; this can be at a discount of up to 25% of market value at the time you were offered the options.

“For example, if you start this year and save the maximum amount over five years, at the end you’d have €30,000,” says Michael O’Scathaill, a tax director with Crowe Ireland. “Say you are given the option to buy an amount of shares that are worth up to €40,000 in 2019, at a 25% discount. You might find that by 2024 those shares have gone up in value to €45,000, yet you can still buy them for €30,000, so effectively the benefit has now gone up to €15,000.”

You pay USC and PRSI on this, but no income tax. If you sell them, you pay CGT on the €15,000.

Employees are under no obligation to buy the shares at the end of the savings period; you might decide not to do so if, for example, the market value has dropped below the discounted price. In this case, you simply get your savings back — with no DIRT taken off, as would be the case in a normal savings account.

And, notes O’Scathaill, you can generally choose to exercise only some of the options or take a mix of cash and shares at the end of the vesting period.

According to Gill Brennan, chief executive of the Irish ProShare Association, even if you have no intention of exercising your share options at the end of an SAYE period, it is still “the most advantageous way for employees to save at present” — and particularly appealing for some workers, she says, because of the zero-obligation element.

Finally, if you work for an SME, you may have an option to join a KEEP scheme. With this you get share options as in the above schemes, which you can exercise upwards of one year later. At that point, you will neither pay income tax, PRSI nor USC on any increase in share value, but if you sell you must pay CGT on any gain. The scheme was designed to facilitate share ownership in private companies, but has been a flop.

A golden opportunity?
On balance, says Brennan, employees who do not participate in share purchase plans are doing themselves a disservice.

“If you’re not availing of the opportunity, you are throwing money away, considering the way inflation and interest rates are,” she says. “Also, if you take part, you are engaging with the company, you’re thinking about the company’s results. It’s a great way of working. That’s why a lot of companies that operate share plans don’t see a dip in share prices.”
She says she knew one employee who worked for the same company for 15 years and participated in the share option scheme from the start. “He funded three months off work to travel, put a down payment on a house, funded his wedding and bought a car, and he wasn’t at executive level.”

Reasons to be cautious
If you are in an APSS, it is of course possible that the company shares will fall in value over the three years. Brennan says that in practice it is rare for employees who participate in APSS schemes to see the price go down. However, she says, it can be hard for employees to think three years ahead, and if you sign up to a scheme and move to a new job within three years, you lose the share options.

There is also a risk of putting all your investment eggs in one basket, especially if you hold on to your stock long term. In a blog on the topic, Keith Sciascia, associate director of Davy, says many senior executives hold on to their shares “in the hope or assumption that the value of their stock will keep rising ad infinitum”.

He adds: “Whether through apathy, lack of strategy or both, this is a risky business. Whatever the circumstances, a concentrated position leads to a disproportionate allocation of wealth, where the employee ends up with an outsized investment in a single company.”

Bob Quinn, principal of the Money Advisers, also sounds a note of caution.

“Many members regret signing up to a vesting period when they find they need the money for children’s education, replacing the car and so on; are unable or unwilling to sell because the share price has dropped; or, like many members of the schemes on offer through banks such as Anglo Irish Bank back in the late 2000s, the share price has collapsed.”

Private companies
You can get share options in a private company just as you can in a listed company. The advantage of the latter is that there will be a bigger market for your shares when it comes to selling, whereas with a private company it is not always immediately apparent who the purchaser would be. Nevertheless, says O’Scathaill, if you are an employee and get a sense that there might be a big sale event in the short to medium term, becoming a shareholder can be quite attractive.

Unapproved schemes
Not everyone who is offered a share option scheme will have access to any of the above Revenue-approved schemes. Some multinationals in Ireland prefer to offer their employees “unapproved” share options. While these also allow you to purchase shares at a certain price in a certain time frame, they do not come with any tax incentives. You would be liable for up to 52% (income tax plus USC/PRSI) on any increase in value when you actually receive the shares — plus CGT on any profits made in a sale.

“A lot of the multinationals are turning to global share option plans whereby there are no tax incentives in the local jurisdiction,” says Brennan. “This means that, whether you’re an employee in Ireland or Abu Dhabi, you can buy the stock at the same price but you cannot avail of any local tax incentive such as the APSS.” For this reason, she says, local plans are far better from the employee’s perspective.

Finally, you might be offered phantom shares — virtual shares in your employer’s company. You track their performance and, three years down the line, you earn a cash bonus determined by how well or otherwise the stock has done in the interim. All the usual taxes will apply.

For additional information on tax-efficient employee reward schemes, or any other tax matters, please contact a member of our tax team.