Guernsey: Offshore ESOPS For UK Companies

Last Updated: 5 January 1999

ESOP stands for Employee Share Ownership Plan. An ESOP is a trust for the benefit of a company's employees. The purpose of an ESOP trust is to acquire shares in the company - with funding provided in the form of a gift or a loan by the company - and distribute those shares to some or all of the company's employees. This is usually via one or more employee share schemes such as share option schemes, profit sharing schemes or restricted share schemes.


There has been an enormous growth in the number of ESOPs in recent years. The main reasons for setting up ESOPs are:-

1) Motivation of Employees

A method of motivating employees is to link their compensation package to the performance of the company. This can be accomplished by providing employees with the ability to acquire shares in the company through an employee share scheme. Employees will then have a very tangible means to profit from the company's success.

2) Rewarding Key Employees

A company is able to retain full discretion on which employees participate in an ESOP, with the result that the company can focus rewards on employees who have made a key contribution to the company's success, and are under no requirement to base awards on the length of time the employee has been with the company.

3) Retention of Employees

By enabling key employees to participate in an ESOP, it is possible to reduce the likelihood that those members of personnel will be tempted to leave the company and move to competitors. Offering participation in an ESOP can also help to attract high calibre staff.

4) Tax Deductibility

Contributions by a company to an ESOP should generally be deductible for corporation tax purposes provided that the contributions are of a revenue - rather than capital - nature and are incurred wholly and exclusively for the purposes of the company's trade.

5) Acting as a market maker

For an unquoted company an ESOP can play a valuable market making role. The alternative may be for the company to buy back its own shares but this is likely to create tax and company law complications and will result in the shares being cancelled.

6) Putting shares in friendly hands

One motive for setting up an ESOP may be to buy out a dissident shareholder and to ensure that the shares pass into ownership which is likely to be sympathetic to the other shareholders. However, the prime motive behind the ESOP must be to encourage or facilitate employee share ownership otherwise the ESOP will be outside the 1985 Companies Act definition of an "employees' share scheme". Falling outside this definition is likely to have very serious consequences because whatever financial assistance the company gives to the ESOP to enable it to purchase shares is likely to constitute a criminal offence under s151 of the Companies Act 1985.

7) Maintaining Earnings per Share

A company's earnings per share will be maintained if it purchases existing shares for employees via an ESOP rather than issuing new shares to them.

8) Servicing a restricted share scheme

The 1995 Greenbury Report on Directors' Remuneration suggested that companies should consider replacing share option schemes with restricted share schemes. Although there are many variants of restricted share scheme, the basic idea is that shares are held in trust for executives for a certain period and released to them - free of charge - at the end of that period, provided that they remain in employment and that the company has achieved pre-determined performance targets.

As the shares are held in trust during the "restricted" period, a restricted share scheme needs to operate in conjunction with an ESOP trust.

9) Circumventing ABI anti-dilution limits

Quoted companies are subject to limits imposed by institutional shareholders on the percentage of share capital which they can allot under their employee share schemes and many companies run short of shares - particularly for their senior executives. However, the limits are designed to prevent excessive dilution and therefore only apply to the issue of new shares. So the use of an ESOP - which purchases already issued shares - circumvents these limits.


1) Capital Gains Tax

The main reason for ensuring that an ESOP is not resident in the UK but instead resident offshore will be to enable the ESOP to defer/avoid any liability to UK capital gains tax. The following example illustrates how such a liability may arise.

A typical ESOP linked to a share option scheme may operate as follows:-

May 1996: ESOP buys 500,000 shares at £1.50. ESOP grants options over 500,000 shares at £1.50.

May 1999: Option holders exercise options over 500,000 shares at £1.50 when share price has risen to £2.50.

Although the share price has risen, the ESOP has made no gain and therefore has no CGT liability.

However, if the shares are retained in trust for any period prior to options being granted, an ESOP may make a taxable gain on those shares. For example:-

May 1996: ESOP buys 500,000 shares at £1.50.

May 1998: ESOP grants options over 500,000 shares at £2.00.

May 2001: Option holders exercise options over 500,000 shares at £2.00.

The ESOP will have made a taxable gain of £250,000 (500,000 x 50p).

If the ESOP is resident in the UK it will be subject to capital gains tax at the rate of 34% to give a liability of £85,000.

However, if the ESOP is offshore, it will be able to rely on the general exemption from UK capital gains tax for non-residents.

2) Other taxes

Offshore ESOPs can benefit from the general exemption from UK inheritance tax for ESOPs.

An offshore ESOP will have no liability to UK income tax in respect of non UK income such as foreign bank interest. If ESOP trustees waive their rights to dividends, they will also avoid the liability to pay additional rate income tax.

The value of shares distributed to employees through an ESOP does not attract National Insurance contributions for the employer or employees.


Bank of Butterfield International (Guernsey) Limited is able to provide a comprehensive service to offshore ESOPs as both Corporate Trustee and Administrator of any employee share option scheme, profit sharing scheme or restricted share plan.

This article provides a general outline on the subject at the time of writing (November 1996). It is not intended to be exhaustive nor to provide legal advice in relation to any particular situation and should not be acted on or relied upon without taking specific advice.

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