In the Vestd Articles of Association, growth shares are called V shares.
As growth shares, the V shares only share in the capital growth of the business from the point that they were issued.
So, for example, if V shares are issued at a hurdle of £1 per share, they will only share in any eventual net sale proceeds above £1 per share. This means that existing shareholders are only diluted for growth from that point, rather than the existing worth of the company.
The purpose of using growth shares as V shares is to limit the risk of the recipient being exposed to Income Tax on award of the shares.
So long as the shares are issued at a hurdle - typically 10-40% above the current market value - then recipients are only exposed to Capital Gains Tax on the eventual sale of the shares.
Any dividends they receive, of course, would meet with the standard tax treatment for dividend income at the time.
There are a few additional issues that should be understood. The valuation of a business for HMRC purposes is not an exact science. Furthermore, it is not possible to get HMRC to pre-approve a valuation for a growth share scheme, but our Valuations team will create your hurdle valuation which you can use to issue growth shares.
Depending on the nature of your company, the hurdle valuation will include a 10-40% premium on the current market value. This reflects the 'hope value' of the shares and helps mitigates any risk of HMRC retrospectively deciding that the growth shares were undervalued on issue.
If HMRC did determine that the shares were undervalued, they would charge Income Tax on any differential between the hurdle and their determined market price at the time.
Below is an “opinion” from our legal adviser, who drafted the Articles that addresses this:
“In relation to the V Shares, as drafted in the pro forma articles for platform companies, we would confirm the following based on the law (and our understanding of HMRC's interpretation of the law) as it stands today:
- The V Shares will form part of the company's share capital.
- For a UK-based individual consultant, contractor or adviser, we would expect that the receipt of a V Share (or the grant of an option over V Shares) will be a trading receipt that is subject to income tax by reference to its prevailing market value (see below). Thereafter, a UK-based individual would be liable to capital gains tax by reference to the future growth in value (being the amount of any ultimate sale proceeds less the base cost of the shares). No further charges to income tax would ordinarily arise unless changes are made to the equity structure or another material event arises in relation to the company which increases the value of the V Shares on a non-arm's length basis.
- For a UK-based individual employee, we would expect that the receipt of a V Share (including on the exercise of a non-EMI option) will be treated as remuneration for the employment and give rise to income tax by reference to the prevailing market value of the V Shares acquired (see below). This income tax will be payable under self-assessment unless the shares are 'readily convertible assets' at the time of acquisition (essentially, this is assessed by reference to the marketability of the shares). If the shares are 'readily convertible assets', the income tax will be payable under PAYE and NICs will also arise (for both the employer and the employee). Thereafter, a UK-based individual would be liable to capital gains tax by reference to the future growth in value (being the amount of any ultimate sale proceeds less the base cost of the shares). To avoid any future income tax charges under the 'restricted securities legislation', we would recommend that an employee is always required to enter into a section 431 election (see here) within 14 days of the acquisition of shares. Whilst the 'employment-related securities' legislation sets out a number of other situations in which future income tax charges may arise, these should not ordinarily arise if no changes are made to the company's equity structure or if no other material event arises in relation to the company which increases the value of the V Shares on a non-arm's length basis.
- For tax purposes, the 'unrestricted' market value of the V Shares will take into account the hurdle. Whilst we understand that the platform will seek valuation advice on each occasion that V Shares are issued, in our experience, the V Shares are unlikely to have value from a tax perspective if the hurdle is set at a small premium (20 to 40%) of the prevailing non-discounted value of the ordinary shares.”
- Vestd does not support nil-paid shares, so growth shares must be issued at nominal value and fully paid up upon acceptance. When the recipient accepts the growth share issue, they must pay the company nominal value for their growth shares. We'll then send an SH01 to Companies House on your behalf which will state the price paid per share as £(NV).
Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'