What are growth shares?
Typically, a growth share is a class of share structured so that the holder only benefits from the growth in value of the company from the time the share is issued to the participant.
Usually the aim is to ensure that the existing value of the company is preserved, perhaps for founder shareholders, but the growth thereafter is shared equally amongst all shareholders, including the growth shareholders.
Advantages of using growth shares
- Aligns the interests of the employee with the shareholders.
- Participants become shareholders immediately.
- Employers can attract executives who are key to the business (but whose salary expectations are more than the employer can afford in salary terms) with the promise of equity in the company.
- Effective as a way of sharing future value while securing rights to existing value.
- Relatively straightforward to set up and administer.
The tax benefits of growth shares
- No income tax implications when the shares are issued because the employee will purchase the shares for the full market value. Being entitled only to a share in future value of the company will generally mean the value, and therefore price, of a growth share is low.
- On disposal, Capital Gains Tax (CGT) would apply after the deduction of any unused portion of the current CGT annual allowance and Entrepreneurs' Relief might be available (if the holding meets the relevant conditions).
- Current CGT rates are 20% for higher rate tax payers. Compare this with the equivalent higher income tax rate which is 40%.
Growth shares are not part of an HMRC approved scheme therefore the tax treatment cannot be guaranteed.
What kind of incentive are growth shares?
This is a direct form of employee share incentive because the participant purchases the growth shares and immediately owns them.
As a result employers will want to consider the following:
- whether a new class of shares should be created and used (varying the rights of shares with regards to voting, dividends, thresholds, etc.)
- what should happen if the participant ceases to be employed; should they be allowed to keep or be required to sell the shares they own
- whether a shareholders' agreement is needed and if the existing articles of association are fit for purpose given the introduction of employees as shareholders.