Share plans and reward

Growth shares are a special type of shares designed to align with strategic objectives. The goal is to ensure that if these objectives are achieved, the shares grow in value. Providing growth shares incentivises new shareholders to help the business achieve these objectives.

If the business grows, the value of these growth shares should too.

Considerations when providing growth shares

• Changes will need the support of 75% of the shareholders. This is because the articles of association of the company need amending and that requires a special resolution passed by.
• If the participant pays less than the initial market value for the shares, the discount is subject to employment income.
• The initial value of growth shares is usually lower than ordinary shares.  A robust valuation is needed to meet HMRC expectations.
• If the performance conditions are relatively stretching, when achieved, the increased share value should be treated as an inherent capital gain and not employment income.
• Growth shares may be awarded via a tax-advantaged EMI or CSOP.

Employee ownership trusts (EOTs) enable business owners to sell their controlling interest in a company to a trust for the benefit of employees. With this arrangement, the owner will usually receive tax relief, and there are potentially tax-free bonuses for the employees too.

Successful EOTs include John Lewis, Richer Sounds and Arup. Each employee-owned company is different, and the structure should reflect the culture and ambitions of the organisation.

EOTs are usually used as an exit strategy for controlling shareholders, but they are also an effective incentivisation tool. Once established and the shares have been transferred, the company can pay additional rewards to employees in the form of tax-free bonuses of up to £3,600 a year. Transferring shareholders may sell their shares to an EOT and claim exemption from tax on all capital gains.

Becoming an employee ownership trust – key points

• Most of the company’s ordinary shares will be transferred when the EOT is created. Transferring shareholders, the company, and the trustees acquiring the shares must receive specific tax and legal advice.
• Trustees must take reasonable steps to be satisfied they are not buying the shares for more than the market value.
• Communication with employees, trustees, and the current shareholders is a vital part of establishing EOTs and should be built into the planning.
• Original or family shareholders must give up control. Former shareholders must not be able to control the trustees. For example, they can have a voice through management committees or on the board of trustees but must represent less than 50% of those committees.

We can provide support with all aspect of EOTs, including:

• Setting up the trust
• Valuing the shares
• Helping owners find finance
• Legal drafting of documentation and sale agreements
• Structural advice on the governance structures, eg employee councils.

Enterprise management incentives (EMIs) are share options that enable you to incentivise your team to grow the company with little to no expense. They are one of the most effective types of employee reward schemes. EMIs give your employees the opportunity to benefit from company growth and better align with other shareholders’ goals.

EMI options can strengthen your recruitment and retention thanks to numerous benefits, including:

• Greater employee incentivisation and rewards.
• Employee tax on gains is deferred up to 22 months after the employee sells the shares.
• Performance conditions that can directly link rewards to performance.
• No income tax liability on the growth in value and the possibility of business asset disposal relief (previously entrepreneurs’ relief) on disposal.
• No loss of control for existing shareholders.
• Succession planning for existing shareholders.
• Corporation tax deduction for the employer company equal to the employee’s gains.

We can help you create and implement the right EMI options plan for your business, so you and your employees get the most out of the options available to you. 

A share incentive plan (SIP) is a tax-efficient way of giving shares to employees. SIPs can provide employees with up to £9,000 worth of shares each year, potentially free of tax and National Insurance contributions (NICs). The employer can also reduce its NICs.

There are three main types of shares available with SIPs:

• Free shares
• Partnership shares
• Matching shares.

As well as incentivising employees, businesses can claim relief on corporation tax for the value of shares provided under the plan.

We can work with you to develop, implement and manage the right SIP for you and your employees. Our experts will also help you efficiently navigate the tax landscape to maximise your plan’s offerings.

CSOPs are statutory share incentives that allow you to grant tax-advantaged share options to selected employees. 

Important issues when granting company share options

• CSOP options can allow each employee and full-time directors to buy shares with a total market value of up to £60,000 at the time of the award (including any current EMI options).
• The price of the shares must not be less than market value at grant.
• Subsequent increases in the share value are usually taxed as a capital gain, not income, so there is no National Insurance contribution (NIC).
• You must register your company’s CSOP and self-certify that it meets conditions to qualify for favourable tax treatment by 6 July following the tax year in which an award is made. 

Under a SAYE share option plan (Sharesave), employees can pay directly into a savings account via payroll and use it to buy shares through an option scheme. They can also opt to withdraw the savings for other uses, giving them more flexibility. 

Creating save as you earn share option plans - considerations

• You can create the option for employees and directors to buy shares in three or five years’ time based on the market value of the shares at grant, or with a discount of up to 20%.
• All employees must be offered the chance to participate, but you can include an employment qualifying period of up to five years.
• Participating employees make payments of at least £5 (maximum £500) per month. Some payment holidays are allowed to cover special leave situations. All payments are deducted from salary or wages after income tax and National Insurance contributions (NICs).
• There is no tax liability for qualifying options used within six months of the end of the savings period or if an option holder’s employment ends due to injury, disability, retirement, redundancy or because of a takeover or certain other corporate events.
• When shares are sold or transferred, normal capital gains tax (CGT) rules apply.
• An additional tax benefit arises if shares acquired through a SAYE share option plan are transferred into an ISA or a personal pension within 90 days of the purchase.