Employment Tax

Complex share award schemes

Produced by Tolley in association with Caroline Harwood of Burges Salmon LLP
  • 19 Oct 2021 23:29

The following Employment Tax guidance note Produced by Tolley in association with Caroline Harwood of Burges Salmon LLP provides comprehensive and up to date tax information covering:

  • Complex share award schemes
  • Commercial objective for both types of plan
  • The company’s position ― issues common to both types of plan
  • Joint ownership plans
  • Outline structure
  • Income tax treatment of the employee
  • Income tax treatment of the employee ― valuation
  • Tax on future growth in value
  • When is a joint ownership plan appropriate?
  • Flowering shares
  • More...

Complex share award schemes

Companies engage in more complex planning for their share incentive arrangements for a number of reasons. These include funding issues for participants where:

  1. the initial value of an award is relatively high

  2. companies are having to deal with headroom issues (ie they may have reached their limits on shareholder dilution)

  3. companies wish to take advantage of potentially beneficial tax treatment for their employees where such companies do not qualify for the tax advantaged plans which satisfy the requirements of ITEPA 2003, Schs 2–5 (the qualifying plans), including Enterprise Management Incentives (EMI) and the company share option plan (CSOP)

As such, more complex plans aim to provide a share-based award for employees with a low initial value but with the potential to generate growth in the shares that is subject to capital gains tax rather than income tax.

This note looks at two different structures often used to achieve this aim by summarising the commercial considerations, an outline of the structure and briefly discusses the tax treatment of each:

  1. jointly owned share plans (also known as JSOP or split interest plans)

  2. flowering shares (also known as growth share plans)

It should be emphasised that professional advice should be taken before embarking on the implementation of either of these arrangements, as this note is a summary and not a comprehensive guide.

Commercial objective for both types of plan

The objective of both of these arrangements is to reward the participating employee with an increase in the value of shares in his employing company or group, often linked to corporate performance conditions, in a tax efficient manner. The theory is that by achieving a beneficial tax treatment, the plan puts in place an effective incentive as the individual will be able to retain more of the gain they have worked to help generate. The reward is hence more meaningful to the employee and potentially more cost effective for the employer.

As a result, the JSOP route is most commercially useful

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