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When to use growth shares
For business owners, growth shares are a way to:
- Issue equity to UK-based employees and other key people in a tax-efficient manner.
- Issue equity to individuals overseas.
- Incentivise senior or more experienced members of staff to drive company growth.
- Start transferring shares as part of a business succession plan.
How are growth shares taxed?
With some schemes like EMI, the cost of setting up the scheme can be offset against Corporation Tax. The same can’t be said for growth shares, but they’re still more tax-efficient than ordinary shares.
Growth shares and Income Tax
In the UK, recipients don’t generally pay income tax when they receive their growth shares so long as the hurdle rate is set at 10-40% above the market value. This article goes into more detail.
Growth shares and NIC
As there’s no income tax to pay upfront, employers don’t have to pay PAYE or make National Insurance Contributions either.
Growth shares and Capital Gains Tax
When the recipient sells their growth shares, Capital Gains Tax (CGT) may be payable on any growth in the value of their shares. Typically, 18-24% CGT but only after they’ve exceeded their annual tax-free allowance.
Growth shares and BADR
Growth shares can qualify for Business Asset Disposal Relief in some circumstances (emphasis on the 'some'). It’s quite complex.
The person with growth shares claiming BADR must have at least 5% of both the shares and voting rights, and be entitled to at least 5% of either profits on winding up or proceeds of an exit.
It’s quite nuanced so do check out this article.
The table below illustrates how growth shares compare with other schemes tax-wise for a UK-based employee:
For more information on how share options are taxed, in particular unapproved options, see this article. As with anything and everything relating to tax, if ever in doubt, seek professional advice.
Growth share dividends
Growth shares can have full rights to dividends but it’s an area to tread carefully. It’s also very much a commercial decision dependent on that company’s specific circumstances. Learn more.
Growth shares vs other share incentives
There’s more than one way to give key people skin in the game! Below we compare other popular methods UK companies use to share equity with their teams.
Growth shares vs ordinary shares
Ordinary shares are what most people think of when they think of shares. Usually (but not always) ordinary shares give the holder of each share the same rights to dividends, capital and voting in the company.
The main drawbacks to using ordinary shares are that they're unconditional and often taxed heavily. In that respect, growth shares offer existing shareholders more protection and a tax advantage.
Growth shares vs share options
What's the difference?
Simply put, share options give someone the right to buy shares in the company in the future at a pre-agreed price. Whereas, growth shares are actual shares. So once issued, recipients become shareholders immediately (though the shares themselves aren't that valuable yet).
However! Both share option schemes and growth share schemes can be conditional - which means that when these pivotal moments occur, and under what conditions, can be determined by the employer. Share options tend to vest over time but growth shares can too.
Unlike growth shares, unexercised share options can lapse, so there’s no need for the company to buy the shares back, which makes things a bit less complicated in the event someone leaves.
Both growth shares and share options ‘get the job done’ in mobilising and incentivising teams - just in different ways. Let's look at growth shares versus three option schemes: EMI, CSOP and unapproved options.
Growth shares vs EMI
EMI is the most tax-friendly share option scheme in the UK by far. EMI options by their very nature differ from growth shares, but both can be used alongside each other to reward teams.
EMI offers greater tax advantages but is far less flexible than a growth share scheme, which can be used to reward people other than employees.
As wonderful as they are, there are also other restrictions with EMIs. But unlike growth shares, with EMI, companies can usually offset costs against corporation tax by claiming a deduction for the full amount of an employee's option gains.
A valuation approved by HMRC is a no-brainer for EMI as it reduces the risk of HMRC ever challenging it in the future (in particular, the AMV and UMV). Getting a valuation for a growth share scheme is wise too.
Growth shares vs CSOP
Company Share Option Plans (CSOPs) are the next best thing to EMI in terms of tax efficiency. Often companies explore CSOPs when they’ve exhausted the limits of EMI.
CSOP is another tax-savvy share option scheme for UK companies. Companies can also offset costs against corporation tax, the same as EMI, in most cases. And again, it's vital that HMRC gives the valuation the green light.
Growth shares vs unapproved options
Unapproved options are not as tax-efficient as EMI or CSOP, or growth shares for that matter, but they are even more flexible. Unapproved options are share options with broad eligibility criteria and no limits. It’s one of the easiest schemes to set up, with no approval needed from HMRC.
That’s the long and short of it, but you can quickly compare them all using the chart below (click to expand):
Growth shares and EIS
There's a misconception that growth shares can’t be used alongside the Enterprise Investment Scheme (EIS).
But it’s actually fairly simple to protect your EIS eligibility when using growth shares - the EIS shares just can’t carry any preferential rights.
We've designed the Vestd Articles of Association so that any ordinary shares issued under EIS do not get a preference regarding dividends or following an exit. So customers don’t need to worry about this one.
Growth shares and succession planning
Business succession planning or exit planning is something owners need to think about (and the earlier, the better).
It’s not unheard of for founders to use growth shares as part of a gradual transfer of ownership. They may issue growth shares to senior members of the team with a future management buyout (MBO) in mind.