UK: Joint Share Ownership Plan (JSOP)

Last Updated: 13 August 2013
Article by Smith & Williamson

JSOPs are an opportunity to offer employees share awards above the limits imposed by the tax favoured approved share schemes. Awards under a JSOP are commonly used as a means of rewarding, incentivising or retaining employees or for a combination of these objectives. The JSOP is usually used on a selective basis.

It allows employers to align employees' interests with those of the company to ensure future growth. As the company grows employees benefit from the increase in value of the shares which are then taxed under the more favourable capital gains tax regime. This then encourages employee retention.

What is a JSOP?

A JSOP is a flexible employee incentive arrangement that can be used by listed and privately held companies, and tailored to meet specific requirements.

The employee jointly acquires shares with a third party, usually an employee benefit trust (EBT). The ownership of the shares is structured such that the employee pays a small up front payment and is entitled to the subsequent growth in value of the shares which will be subject to capital gains tax.

Why use a JSOP?

The main benefit of the plan is that employees can acquire shares in the company, and if appropriately structured, the gain on their share is subject to capital gains tax (CGT) at the main rate of 28%, for a higher rate taxpayer (although if the employee has a sufficient interest in the company's shares the entrepreneurs' CGT rate of 10% may apply to any gain).

Employees value both the tax-efficient nature of the plan and the opportunity to participate in the growth of the company which in turn can have a positive impact on motivation and retention.

The plan can be used on a one-off or regular basis and no separate class of shares is required.

How does a JSOP work?

The employee and the EBT jointly acquire shares, either by way of a subscription for new shares or by the acquisition of existing shares. The EBT buys the beneficial interest in the value of the shares up to a specific amount or percentage value and the employee buys a restricted beneficial interest entitling them to an increase in value above this specified amount or percentage.

The employee's interest will entitle him to all, or most of the future growth in the value of the shares. The plan may impose a hurdle increase in the value of the shares which must be achieved before the employee receives any value. The employee's interest may also be forfeited if he leaves or if certain targets are not met.

The EBT's interest is limited to the current value of the shares plus the hurdle increase in value, if one has been imposed.

At the end of the forfeiture period (if any), or at an agreed time, the employee's rights crystallise and they receive a fixed number of shares equal to the growth in value of the share or the jointly owned shares.

The EBT will be funded by the company to enable it to acquire its interest in the shares, which will normally be by way of a loan, which will be repaid when the trust sells its shares. The employee's original acquisition can also be funded by a loan from the employer.


Under both UK GAAP (current and FRS 102) and IFRS the JSOP will be regarded as a share-based payment arrangement, with the detailed accounting treatment being determined by reference to the terms of the plan.

Share-based payment arrangements can be either 'equity-settled' or 'cash-settled'.

When the JSOP is accounted for as an equity-settled arrangement, the charge to the profit and loss account is calculated by reference to fair value at grant date determined using an appropriate financial model. The period over which the charge is made will be determined by the terms of the arrangement. When the JSOP is accounted for as cash-settled, the fair value of the future liability is re-measured at each reporting date and again at settlement. Advice should be sought as it is not always certain which accounting method will apply and this may vary between the group and subsidiary level.

Although the shares will be held in a separate trust, both UK GAAP (current and FRS 102) and IFRS require that the shares are reflected in the accounts of the company.

Corporation tax

The employer will usually qualify for a corporation tax deduction on the amounts on which income tax is paid, providing the shares satisfy the conditions as 'qualifying shares' for this purpose at the time of the charge. If the company is close and there is a loan to a participator, consideration will need to be given to whether there is a charge under the 'loan to participator rules'.

Income tax and NIC

There is no income tax on the acquisition of the interest in the shares if the employee pays the market value on acquisition, which will be low if correctly structured to be based on the potential growth in the value of shares above any hurdle.

If the employee pays less than the market value of the interest, there will usually be an income charge. If any restriction is placed on the employee's access to his interest, there will also be an income tax charge on the lifting of that restriction, unless an ITEPA s431 election is made jointly by employer and employee, to have the full amount of income assessed at initial acquisition as if there are no restrictions. Under this type of arrangement the s431 election will be made.

If the company is listed or has a market for the shares, any employment income tax must be collected through PAYE and there will also be a national insurance (NIC) liability.

If the employer advances a loan to fund the acquisition, the loan can be interest free or interest bearing. To the extent that the loan is interest free or provided at a rate lower than the HM Revenue & Customs (HMRC) official rate of interest, there would be an income tax and NIC charge on an imputed rate (4% per annum at the time of publication). If the employee is a full time working director of a close company, the imputed tax charge should not apply. If at any time the loan is waived by the company, an income tax and NIC liability will arise. However, if the company is a close company the loan waiver may in certain circumstances be treated as a dividend and taxed at the dividend rate.

Capital gains tax

A capital gains tax liability will arise when the employee disposes of his interest in the shares. The chargeable gain will be based on the sale proceeds less the value of the shares on receipt, subject to the special rules for share cost 'pooling' where the employee also holds other company shares.

For whom is a JSOP suitable?

The use of a JSOP is particularly attractive to the types of employers set out below.

  • Companies seeking to align the employees' interests with those of the company and other shareholders to ensure growth.
  • Companies looking to lock-in key employees in the medium term.
  • Companies not specifically entering into arrangements to obtain corporate tax relief.

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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