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You want an individual executive, director or consultant to be incentivised properly but how can this be done responsibly given the current publicity about big bonuses, the risk that options will go ‘underwater’ with share price fluctuations, and, in particular, with the high and rising levels of tax and social security contributions for employees, and matching contributions and compliance for companies?

Although the acquisition of shares will always carry some risks and not every individual may want to take a stake in the business, there is an arrangement that could suit many companies and their executives in this situation: Joint Share Ownership Plans (JSOPs, although they have a variety of different names, some trademarked, in the UK!).

What can this type of plan offer?

The individual obtains a real and immediate interest in shares in the company. The company can, if it wishes, ensure that the shares are not registered in the name of the individual, which can simplify arrangements in the event of a cessation of employment. The individual will normally have a nominal initial interest in the shares, creating a low initial value (for which the individual pays), with that interest growing as the shares increase in value.

Gains arise from a growth in value of the shares so that, for UK tax purposes at least, gains should be taxed at capital gains tax rates (currently 18%). This should be compared with the much higher income tax rates and national insurance contributions on gains arising from the exercise of unapproved options over shares.

The maximum potential loss to the individual should be the (usually low) amount of the initial cost paid by him on acquisition of his initial interest in the shares. Good leaver/bad leaver provisions may be built into the JSOP as well as some performance related criteria, where appropriate. This can be used equally for employees, consultants and nonexecutive directors.

Downsides? Nothing is perfect!

In the UK it may be difficult to obtain a corporation tax deduction for the value of any shares passing to the individual. There will be some initial set up costs, the costs of share valuations and initial professional fees and fairly modest annual running costs with some fees for professionals and valuations.

Two initial questions

We are frequently asked two initial questions about JSOPs: what sorts of companies have used this type of plan and how does it work?

Many different types of companies have considered JSOPs. They can work well for smaller but growing companies where the triggers for exiting from the arrangement and the realisation of the gains by the individuals are linked to specific exit events, such as a sale of the business, a change of control of the company or the admission of the shares to a market such as PLUS or AIM or one of the recognised stock exchanges. It is also suitable for companies whose shares are already publicly traded (and we have advised mostly in this area to date). Do note that where a company is a public limited company or where it is regulated by AIM or a stock exchange, there will be broader company law, FSMA and other regulatory factors to be taken into account when considering this type of plan.

And how does it work? Well in basic terms it is what it says on the label. The individual jointly acquires and then jointly owns shares together with a trustee that is independent from the company. The split of the ownership of the shares will vary according to the value of the shares but can be structured so that all or most of the increase in value of the shares following subscription or purchase under the arrangement will pass to the individual.
The individual will normally pay full market value for his initial small interest together with the ‘hope’ growth value, which is usually a fairly
small percentage of the current market value of the shares. As mentioned previously, any increase in value beyond that initial value should be taxed
(in the UK) as a capital gain only.

JSOPs can be made to suit the needs of many companies and their executives though, as always, it is important to consider all the broader aspects before proceeding and essential to take specific legal, tax and accountancy advice before deciding if it is right for an organisation.

Fiona Bell specialises in employee share plans, including UK and global plans, HMRC approved or qualifying plans and non-approved plans, considering tax, national insurance, company law, corporate governance and regulatory compliance aspects of plans. As a Chartered Tax Adviser and Trust and Estate Practitioner, Fiona has many years’ experience advising on a broad range of tax issues for employees and individuals.

This article originally appeared in the Communiqué newsletter published by The Bachmann Group.

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