Ireland 
USA Flowering shares
Provides basic information on the use of flowering shares as employee incentives, including how it works, who it is suitable for and the tax implications
What is a flowering share?
Flowering shares offer a tax-efficient means of incentivising employees to partake in the growth of the company. The shares initially hold little value, but this increases (ie the shares ‘flower’) once the business achieves a predetermined level of growth.
How to set up a flowering share scheme
A scheme can be set up by creating a new class of share with restricted voting and capital rights. These shares have rights to a proportion of the future growth in value in excess of the predetermined ‘hurdle’.
Tax/NIC treatment at award and sale of flowering shares
The below table summarises the tax/NIC treatment on award and sale of flowering shares
which do not qualify for any of the HMRC-approved tax-advantaged schemes.
Taxable event | Arrival and registration |
| Award: | |
| Income tax | Tax on the market value of shares less price paid* |
| PAYE/ Class 1 NIC | PAYE/Class 1 NIC on discount if market for shares exists |
| Corporation tax | Tax deduction applicable on discount** |
| Sale: | |
| Capital gains tax | Tax on sale proceeds less market value at award*** |
* The flowering share scheme can be structured so that the market value at award is low, thereby minimising the income tax and NIC arising on the award of the shares to the employee. By setting the hurdle higher than current market value, the value of the shares at the award
date should be low.
**In certain cases, such as for subsidiary companies, a corporation tax deduction may not be applicable.
*** Entrepreneurs’ relief, providing a capital gains tax rate of 10% (compared with the standard 20% rate), may be available if the employee holds at least 5% of the company’s ordinary share capital and other requirements are met in respect of the shares held.
DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Disclaimer
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.
