Joint share ownership plan

Outline

The joint ownership is outlined in a co-ownership agreement which provides that on a sale of the joint shares:

• The EBT receives an entitlement equal to the initial market value of the shares plus (usually) some sort of additional hurdle and/or premium; and

• The employee receives the excess value over and above the hurdle.

Joint shares therefore provide employees with a proportion of the growth in value of the shares, in much the same way as a market value share option of a growth share. Additional employment and/or performance conditions can also be imposed meaning that joint shares offer significant commercial flexibility.

Joint shares can be used by unlisted and listed companies alike and are of particular benefit to companies who:

• have relatively significant value in their shares already;

• want to maximise the potential return for employees through cost and tax efficiencies;

• are not concerned about the loss of corporation tax relief through using Joint Shares (when compared to using options);

• have already used their full entitlement under HMRC backed option plans (EMI or company share option plans) or are restricted from using such plans (through, for example, their size or nature of their trade); or

• do not wish to or cannot establish a growth share arrangement (using a separate class of shares).

Benefits

In additional to their commercial benefits, joint shares offer potentially significant cost and tax savings to both employees and the employer.

Due to the lack of immediate economic entitlement when the joint shares are initially acquired, the full unrestricted market value of the employee’s interest in the joint shares will be relatively low, reflecting the fact that they have at that point in time only “hope value”.  The cost (if any) to employees of acquiring their interest is therefore managed, as is the downside risk to the employee.

By managing the initial value of the employee’s interest, there should be little or no income tax or National Insurance contributions (“NIC”) to pay on acquisition of the interest in the Joint Shares.

Importantly also, any growth in value for the employee should be subject to CGT (usually at 20% and with the use of annual exemptions to mitigate any such tax) and not subject to the higher rates of income tax and NIC.  

Joint share ownership plans therefore offer the beneficial tax treatment usually only reserved for employees under HMRC tax favoured plans (but without their monetary constraints and stringent qualifying conditions) or growth shares.  

It is important to note however that there will be little or no corporation tax relief in relation to joint shares for the employee’s employing company on any element of future growth in value.

Disadvantages

The main downside of joint share ownership plans is their legal and commercial complexity. They are less easy to understand than market value share options or growth shares and therefore are likely only to be appropriate for more sophisticated employees.

In addition, in order to ensure that any capital gain realised by the EBT is not subject to UK CGT, the EBT trustee will usually be based offshore (i.e. in Jersey or Guernsey). This can add to the costs of implementation, ongoing operation and maturity.

Joint shares can be used by unlisted and listed companies alike and are of particular benefit to companies who:

• have relatively significant value in their shares already; or

• want to maximise the potential return for employees through cost and tax efficiencies; or

• are not concerned about the loss of corporation tax relief through using Joint Shares (when compared to using options); or

• have already used their full entitlement under HMRC backed option plans (EMI or company share option plans) or are restricted from using such plans (through, for example, their size or nature of their trade); or
• do not wish to or cannot (for example listed companies) establish a growth share arrangement (using a separate class of shares).

How we can help

We design, draft and implement joint share ownership plans for our clients, covering all tax and legal issues and liaising with share valuers to value the relevant joint share ownership plan interests.