The lesser-known nil paid share incentive

For private companies, the most common share incentive route often involves Enterprise Management Incentive (EMI) options or growth shares, both of which are well-trodden paths. However, if the company wants to give the employee actual shares with an existing value (rather than just an ‘option’), nil paid shares could be an alternative path to take.

What are Enterprise Management Incentive options?

EMI options give employees a tax efficient option to acquire shares at a pre-determined future date. Under the scheme, employees can purchase shares at an attractive price because they can have a minority discount applied to them which is approved by HM Revenue & Customs. This offers the employee certainty that any gain will then be taxed on the basis of capital gains taxes only.

However, whilst the existing shareholders may like the fact that whilst there is an option available to employees, the employees themselves do not actually have the same rights as shareholders. This can sometimes leave the employees feeling left out in the cold, and without any ‘skin in the game’.

What are growth shares?

Where the company wants to give the employees actual shares (and not an option), growth shares are often used. This is where actual shares are issued to employees but they  only share in the ‘increase in value’ of the business. This arrangement  usually limits the value of the shares on day one to a nominal amount, meaning the amount to be paid by the employee (or the tax payable if nothing is paid) is small.

The obvious negative to growth shares is the fact that they only give employees a share of the future growth, not the existing value.

Could a nil paid share be the right option?

A nil paid share is an actual share which usually shares in ‘all of the value of a business’ but one where an employee pays market value (with a similar minority discount applied as under EMI Options) at a future date.

The employee would then not need to pay income tax relating to the nil paid share. The gain would be taxed on the basis of capital gains tax.

The benefits of leaving payment for the shares outstanding are clear to see for the employee, but it does not come without risk. For example, if the company were to decrease in value, the employee would still have to pay the company the previously agreed amount. But in a sense, that risk is the same for all shareholders.  

How Moore Barlow can help

Thomas Clark is a partner in the Moore Barlow corporate law team and specialises in employee rewards and incentives, including EMI options, growth shares and nil paid shares as well as many others. Thomas provides clear and plain-speaking advice which can be understood easily by business owners and employees alike.

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