The following types of Share Plan are designed mainly to give employees the opportunity to have their gains subject to capital gains tax (CGT), currently at 20% for higher and additional rate taxpayers, as opposed to income tax at 40% or 45% and national insurance contributions (NICs).
There is usually a small income tax charge when the shares are first acquired, even though the employee will get no benefit if the share price falls. These arrangements are therefore more attractive if there is potential for considerable future growth in the share price. To the extent that the gain is subject to CGT, the employing company will not normally be able to benefit from a corporation tax deduction.
Companies should also consider granting CSOP or EMI options, where this is possible.
Joint Share Ownership Plan (JSOP)
Employees are awarded part ownership of shares. Typically an Employee Benefit Trust owns an interest in the shares equivalent to their value at the award date plus a hurdle rate of return (say 5% per year). The employee will be entitled to any increase in the value of the shares above the hurdle when the shares are sold.
Growth Shares (or Flowering Shares)
Employees are awarded a special class of shares whose value is based only on future increases in the value of the company.
Nil and Partly-Paid Shares
An employee acquires shares but does not pay their full value until a later date – typically when the shares are to be sold. Any future increase in the value of the shares will be subject to CGT. However, the discount will be regarded by HMRC as a notional loan, which will usually be subject to income tax at the official rate of interest (2.5%, since 6 April 2017).
Contracts for Differences
A Contract for Differences is an agreement to make or receive a payment which is based on the movement of a share price or another index. An employee may, for example, be entitled to a cash payment depending how much an index based on the company’s profitability increases. However, if the index falls the employee will have to pay some money himself. If the contract is carefully designed, the cash payment received by the employee will be subject to CGT (instead of income tax and NICs). The contracts can be used to provide similar tax benefits to a share plan in circumstances where shares are not available.