Under a partly paid share plan employees buy shares in their employer but with the payment for those shares being deferred until a later date.
Partly paid share plans are of particular benefit where the aim is for employees to acquire actual shares in the company but the current market value of those shares is too high for employees to either fund (i) paying that market value or (ii) suffering the tax cost on the market value of those shares if full value isn’t paid.
Actual shares might be preferable to options if having shareholder status is important or if the aim is for employees to immediately enjoy shareholder rights such as votes and dividends.
Typically, the deferred payment is required before a share or business sale or a listing or if the employee ceases employment.
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Partly paid share plans work particularly well where a sale or listing occurs at a higher value than the original acquisition cost. In these circumstances the employee will be in funds to meet the original acquisition cost for the shares and does not have to find the cash themselves to pay the original cost of the shares.
Partly paid share plans can allow employees to acquire shares on a tax efficient basis, resulting in income tax and National Insurance contributions (“NIC”) savings for both employees and their employing company.
Under a partly paid share plan employees acquire an immediate stake in the business they work for but without incurring an up-front tax or investment cost.
Employees can therefore enjoy full shareholder rights including votes and dividends as well as benefitting from shareholder status.
Provided that the employee agrees to pay the full unrestricted market value (“UMV”) for the shares there should be no income tax or NIC as a result of the employee acquiring the shares. Similarly, there should be no income tax or NIC liabilities for either the employee or employer on any future growth in value of the shares above that initial UMV.
Depending upon how the partly paid share plan is structured there may, however, be small ongoing tax costs arising on the value of the deferred purchase price for the shares.
Importantly, any growth in value of the shares above the initial UMV should be subject to the more beneficial rates of capital gains tax (0%-20%).
Partly paid share plans are extremely flexible with the ability to impose additional performance targets and conditions on the employee’s shares. Employee shares will usually also be made subject to leaver provisions so that the employee forfeits his or her shares when they leave the business. These elements help to enhance the incentive and retention impact of a partly paid share plan.
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Under a partly paid share plan employees will agree to pay the full (unrestricted market value) UMV of the shares (as valued at acquisition). As a result, if the value of the shares falls the employee will still be “on the hook” for that price (although this could be waived, subject to tax considerations).
As a result, a partly paid share plan has a higher “risk profile” than an employee share option, where if the share price falls an employee does not have to exercise his or her rights. It may be possible, however, to manage the UMV (and therefore the amount the employee is liable for) by careful design of share rights.
If the employee agrees to pay full UMV for the shares, the employer will obtain no corporation tax relief on the future growth in value of the underlying shares (unlike a share option).
Under a partly paid share plan there are some further legal and tax issues to consider as part of implementation but all of which are manageable.
How we can help
We have significant experience in implementing partly paid share plans. Please contact one of our team for advice.