Growth shares for employees: HMRC-commissioned research

United Kingdom

For many years now, companies have been implementing “growth share” schemes. Under these schemes, employees acquire shares which have little, if any, current value when they are acquired, but if particular company value hurdles are met (often on an exit) the shares can become very valuable, and the gains are subject to the favourable capital gains tax regime. “Growth” shares is just one name for these arrangements.

Private equity-owned companies are great users of these schemes, but they can be established even by mature, unleveraged companies. Quoted companies can also use them with a scheme in a subsidiary company where the growth shares are (when valuable) exchanged for parent company shares issued to employees. They can also be accompanied by arrangements which give entrepreneurs’ relief or even work with the new arrangements where employees give up employment rights for free shares (so called “shares for rights”), where gains are completely tax-free when those shares are sold.

HMRC has recently released a research document (to which CMS contributed). Overall this concludes that these are genuine remuneration arrangements and that tax saving is not the primary concern. Although it is stated that this document does not necessarily reflect HMRC’s or the Government’s view of the arrangements, it is as helpful as something can be at the moment in giving comfort that the arrangements are not intrinsically tax abusive, and have at least a medium-term future.

A link to the report is enclosed.