An effective way to attract, retain and incentivise your key
people is by creating an employee share scheme.
Under these schemes, the company will issue shares (or an
interest in shares) or options to key employees, directors or
independent contractors who accept an offer to participate in the
With the introduction of the Financial Markets Conduct Act 2013,
it has now become possible to offer these schemes without the
requirement for full and detailed disclosure documentation by
complying with the exemption for employee share schemes.
Set out below are three possible employee share scheme
structures that you may consider as a means of rewarding, retaining
and incentivising the key people in your business.
Employee share trust
Under an employee share trust, the company would enter into a
trust deed with a wholly owned subsidiary (Subsidiary). The
Subsidiary will hold the shares on trust for the Participants, who
would acquire a beneficial interest in the shares (Interest) rather
than the legal title.
The Subsidiary would exercise all voting rights in respect of
the shares it holds, which makes this structure relatively easy to
administer. Any dividends received by the Subsidiary will be passed
down to Participants, including any proceeds of sale following an
exit or liquidity event.
Depending on the terms of the trust deed, if Participants leave
the business, they can be paid out for their Interest at fair value
or at some other pre-agreed formula. This formula can be structured
to incentivise participants to stay in the business (for example,
their Interests can vest over time). To the extent a Participant
leaves the business and is paid out, the capital gain should be
non-taxable to the Participant.
Loan to purchase scheme
Under a loan to purchase scheme, shares in the company would be
issued up front to Participants, who would then pay for those
shares using money loaned to them (usually on an interest free
basis) by the company. Participants would then be contractually
required to repay this loan through their salary and any
A loan can also be structured so that a Participant would be
eligible for a cash bonus under their employment or service
contract subject to achieving specific milestones or KPIs, with
such bonuses (if achieved) being applied towards repayment of the
The company should not have to account for fringe benefit tax on
interest free loans to Participants so long as the loan is
structured appropriately and the borrower is an employee. The tax
cost base for the employee's shares should be set at the value
that the shares were purchased for. To the extent the loan is not
repaid, this should generate taxable income to the employee.
Under a phantom scheme, a Participant will be granted what is
known as a "phantom share option". When the employee
exercises the option, they simply get a cash bonus which, subject
to the rules of the scheme, is equivalent to the difference between
the market value of the shares at the time of exercise and the
relevant option price paid by the Participant. Usually, no shares
are actually issued or transferred to the Participant on the
exercise of the phantom share option, as it is effectively a cash
From an income tax perspective, the cash bonus should be treated
in the same way as salary and will be taxed at source under PAYE
A phantom scheme can also provide Participants with a
contractual right to receive a pre-determined percentage of the
proceeds of an exit or other liquidity event. The payment should
also be treated as a taxable payment for income tax purposes, and
be taxed at source under PAYE rules.
Other points to note
Under most employee equity scheme structures, a company can
provide an interest free loan to the Participant to acquire their
interest. The advantage of these loans is that, if they meet
certain conditions, they will not attract a fringe benefit tax
liability for the employer.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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