In a bid to motivate employees and enhance performance, Shropshire business owners are increasingly turning to growth shares as a viable option.
According to Sarah Hartshorn, a representative from Dyke Yaxley Chartered Accountants in Shrewsbury, growth shares present a compelling incentive for employees. “Growth shares empower employees to benefit from the company’s value, but only once a specific valuation threshold is surpassed,” she explained.
Hartshorn elaborated, “The interests of existing shareholders are only diluted beyond this predetermined level, which is typically set above the market value at the time the shares are issued. This structure means that employees can acquire these shares at a reduced price, realizing a return only when the company’s value exceeds the set hurdle.”
Characterized as a unique class of shares, growth shares enable employees to partake in the wealth they contribute to creating, fostering a shared ambition for growth among all stakeholders in the business.
“While growth shares are particularly effective as exit incentives, hurdles may be established before employees can exercise their options,” Hartshorn noted. “In cases of good leaver situations, it is important to highlight that growth shares are generally forfeited when an employee departs the company. Those who obtain growth shares accept the inherent risks and rewards associated with share ownership.”
To mitigate any income tax and National Insurance liabilities, growth shares must be purchased at market value. Hartshorn pointed out that acquiring these shares through an Enterprise Management Incentive (EMI) scheme is often the most tax-efficient route, as it allows for value agreements with HM Revenue and Customs (HMRC).
When employees dispose of their shares, they may be subject to Capital Gains Tax and could qualify for Business Asset Disposal Relief, provided certain conditions are met. This topic is particularly relevant in light of the upcoming budget announcement on October 30.
“In today’s competitive landscape, recruiting, retaining, and engaging staff are critical to achieving growth and long-term success,” Hartshorn emphasized. “Most businesses identify key employees as vital to their future, and growth shares offer a means to retain these individuals while providing incentives for further business growth.”
However, Hartshorn cautioned that enabling employees to acquire shares requires thorough consideration, as neglecting certain tax implications could lead to significant consequences for both the business and its employees.
Dyke Yaxley’s Business Advisory team, based in Shrewsbury and Telford, is equipped with expertise in employee share schemes and is ready to assist businesses navigating this complex process.
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