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Our team can assist you across all areas of employee incentive arrangements, including:
Flowering shares, like other equity-based share plans, offer an effective and tax-efficient way to incentivise key employees where HMRC tax-advantaged schemes like EMI schemes cannot be used. They can also be combined with other types of shares.
Harper James’ employee incentives solicitors have the specialist business, commercial, legal and taxation knowledge to explain the implications of flowering share schemes for your business, and to help implement any chosen arrangement. Before doing so, we will take the time to listen to your financial and business strategic goals to ensure any guidance we offer aligns with your objectives.
Due to the various types of share incentives available, including HMRC tax advantaged and non-tax advantaged schemes, it is important to seek expert advice to ensure that your business is using the most appropriate model which is as tax efficient as possible while achieving its intended aim.
We’ll advise on:
For businesses whose intention it is to grow to a set target and then to exit, flowering share schemes offer an excellent way to incentivise key staff members to remain with the company through the journey, at which point they can reap the rewards of their efforts and loyalty. Flowering shares are not subject to the same requirements as HMRC tax advantaged schemes like EMI share options. However, if you do qualify for EMI schemes, you could also combine them with flowering shares.
The idea is that employees who are offered flowering shares (typically at a low value as early in the life of the company) do not immediately become shareholders with the intrinsic voting and capital rights this offers – this only occurs on achievement of a specific target, such as exceeding a profit target for a future accounting period or exceeding a minimum exit price. This means that for existing shareholders, their shareholding is not immediately diluted, therefore ensuring the interests of founders and early employees are not negatively impacted. Flowering share schemes can even be set up to ensure that holders only ever own a share of the new growth achieved or growth in excess of a target amount, providing even greater protection to existing shareholders.
One of the key benefits of flowering shares for employees is that they can become shareholders with little financial investment (in terms of the purchase cost and/or the tax payable). Furthermore, they will only be expected to pay capital gains tax in the event the shares gain value and the set threshold target is reached.
On award, if the employee pays less than the market value of the flowering shares they will be required to pay HMRC income tax based on the market value of the shares less the price paid When sold, Capital Gains Tax (CGT) will be payable on any increase in value (at 20% or 40% depending on whether the employee is a higher rate taxpayer), less the annual CGT exemption. Flowering shares are considered tax efficient for both employee and employer. CGT may be lowered to 10% if entrepreneurs’ relief is applicable
Flowering shares can also be made subject to forfeiture should the employee leave the company. Furthermore, flowering shares can be combined with EMI options, allowing the company to leverage further commercial and tax advantages.
If you need an introduction to share schemes and which ones might be best for your business, don’t forget to read our advice What are employee share schemes and how do they work?
We regularly help start-ups, SMEs and high-growth businesses incentivise their staff through employee share schemes, as well as investors and entrepreneurs. Flowering shares are most suitable for high-growth companies with an exit strategy.
Start-ups and high-growth companies are a major focus for our firm so we are highly experienced in guiding them from formation through to successful exit, and we appreciate how incentivising employees along the way can aid this ultimate goal.
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