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What are restricted shares?
If an employee is awarded restricted shares, this means that, at least initially, their ability to benefit from their share ownership will be restricted but the restrictions will lift over a period of time.
Why offer restricted shares?
The reason for awarding restricted shares is often to combine two advantages;
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 they have a 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)
encourage the employee to stay with the company by providing that for an initial period (e.g. three or five years), the shares may be forfeited if the employee leaves, and they may not enjoy other benefits such as the right to receive dividends.
How are restricted shares taxed?
The taxation treatment of restricted shares can be relatively complex. For the employee to be subject only to capital gains tax on selling their shares, they will either have to have paid the shares’ full value on acquiring them (disregarding any value discount caused by the restrictions) or income tax (and possibly National Insurance) on any discount.
Tax efficiency (individual)
Tax efficiency (Company)
Ease of setting up
Overall incentive reward value
IT and NICs on vesting – but participant and company may elect to pay this upfront. CGT on any further gains between exercise and sale.
CT deduction on vesting. NICs may be transferred to participant.
Often operated with an employee trust.
Simple to explain, no risk, but not tax efficient.
May be structured as nil cost option or conditional share.
Their advice has guided us step by step through the minefield of financial, fiscal and legal issues to an objective that is effective and rewarding for both the company and our individual members. We could not have achieved it without their help.
Derek Banks, Chairman, Liss Systems Limited
To explore how employee ownership or an employee share scheme could work for your company, call me on 020 3818 9420.