Share purchase (including nil or partly paid shares)

Your company could create an Employee Share Purchase Plan*, under which selected employees are given the opportunity to purchase shares. However, employees will frequently have little spare cash to invest in their company’s shares. It might be possible to lend them the money or simply allow them to pay for their shares at a later date (often called nil paid shares)

(*Sometimes known as a Stock Purchase Plan, particularly in the USA.)

If an employee is awarded nil paid shares, the time when he has to pay for them will be deferred.

The reason for awarding nil paid shares is often to combine two advantages.

  1.  To enable the employee to acquire shares (rather than options) from the outset which will give them an immediate personal financial stake in their company, and so the risk of loss if the company loses value as well as gain if it grows in value. This may be seen to have the related advantage of gains in value being subject to capital gains tax (rather than income tax and National Insurance).
  2. To avoid the employee having to pay for the shares immediately. Instead, payment will be due on a future date or event (such as the employee selling their shares).

As long as the amount ultimately payable is not less than the shares’ value when the employee acquires them, he will have to pay income tax or National Insurance on their value.

And as long as the unpaid amount is subject to interest at HMRC’s Official Rate, the employee will not be due to pay tax on the deferred amount as an employment benefit. However, they will be liable for tax if there is no interest or it is less than the Official Rate.

Unlike with options, any employee acquiring nil paid or partly paid shares will eventually have to pay for them, so they do carry risk.

Tax efficiency (individual)Tax efficiency (Company)Ease of setting upOverall incentive reward valueOther issues
No IT or NICs if shares purchased for market value. CGT on sale of shares – but shares must be paid for at some point.No CT deduction if shares purchased for market value. No NICs on same condition.Usually just a subscription letter.Simple to explain. There is economic risk, but tax efficient.Valuation questions may arise. Liability to pay purchase price may be deferred but never eliminated.

To explore how employee ownership or an employee share scheme could work for your company, call me on 020 3818 9420</strong .

DAVID REUBEN,DIRECTOR