UK: Share Incentives Back in Favour

Last Updated: 6 May 2004
Article by Robert O’Donovan

Originally published April 2004

With share prices on the increase, there appears to be renewed interest in shares as a means of remuneration and incentive. Our experience at RadcliffesLeBrasseur is that there was massive interest during the dotcom boom of 1999 and 2000 but, with falling share prices in the following three years, shares as an incentive have definitely been out of favour.

The markets turned in March 2003 and, since November, we have seen a marked increase in interest. So would share incentives be a sensible innovation for your company?

The answer depends on a number of factors. If you are in the charity sector, for example, share schemes are almost certainly out of the question and you are best advised to move on to the next article!

Could share schemes benefit you?

For many trading companies, however, share schemes are likely to be a possibility. You need to bear in mind, however, that shares on their own mean little, the employee needs to convert his or her shares into cash and that means selling them. Therefore a company with a trade sale or a flotation in sight, or possibly a part sale to an investor, is a prime candidate. If there is no such "exit" in view, then you will need to think about how the employee is going to sell his shares. Would existing shareholders want to buy? Probably not as they already own the company. One is therefore probably looking at a share buy-back or the use of a trust to create a market. Creating a trust adds to the task, but may prove a boon to current shareholders who wish to sell part of their holding.

As a general rule, share schemes in subsidiaries are frowned on by both institutional investors and the Inland Revenue and one should be looking at the parent company in a group.

If you can make arrangements for the shares to be bought, are there other issues? The ideal company from the point of view of share incentives is one with the hope of a significant increase in share values. The reason for this is that capital gains are currently subject to extremely low rates of tax.

Even if growth is not a major prospect, shares may entitle the employee to dividends or simply be a means of his owning a share in the company.

The next step is to work out what the company is out to achieve. Some motives are easy. Shares may be essential for recruitment, for example, when the best candidate for a senior role insists on sharing in what he hopes will be his achievements.

Share schemes can undoubtedly assist in staff retention by putting a cost on an individual leaving. Typically, this is done by granting options which are only exercisable if the employee stays with the company for a number of years. Providing there is a continual feed of options dependent on, say, three years’ service, the employee knows that he will lose two years’ worth of options if he leaves at any time. In such a case, options become effective (or "vest") if the employee stays in service for given periods of time. Curiously, if one were to suggest to staff that part of their pay in a given year would be withheld and only paid if they were still with the company two years later, there would probably be a protest. Yet achieving the same affect through options seems to be wholly acceptable.

As to whether share incentives increase productivity, the position is less clear. There is some evidence that companies with share schemes are more productive, but is this more a result of their having good management which in turn has caused the share scheme?

Pure tax saving is not the best of motives. While some schemes are tax-advantaged they should not simply be regarded as a way of putting cash into employees’ hands without tax.

So what is on offer?

Options are usually a good starting point. Typically, the employee is given the right to buy shares in the future at today’s price. So if the value of the shares goes up, he makes a profit. This arrangement probably suits the employee better than buying shares because if the price falls, he will not lose money. From the employer’s point of view, these are also benefits, the employee does not rank as a shareholder and, if he leaves, one does not have to buy the shares back.

Enterprise Management Incentive Scheme probably the best …..

First prize must go to the Enterprise Management Incentive Scheme ("EMI"). In its simplest form, if the company grants options so that employees can buy shares at market value at the time of grant, and sell immediately after exercise, then the only tax payable is Capital Gains Tax when the shares are sold. After two years with taper relief, this is as low as 5% for a lower rate taxpayer or 10% for a higher rate taxpayer and, with the annual exemption, very often there will be no tax at all. Some industries will be excluded and some companies may be too large, but a vast range of companies will qualify. If there is a reasonable prospect of a growth in share values, this scheme is highly attractive.

Next comes the Company Share Option Plan. Again, options are granted and the gain is subject only to Capital Gains Tax. But if shares are sold immediately after exercise, then taper relief will not be available, although the annual exemption still will be. This may not be material as the initial value of shares which may be put under option is limited to £30,000. This arrangement is really only suitable if you do not qualify for EMI.

Unapproved options, i.e. not falling into any Inland Revenue-approved arrangement, are very much a last resort. No tax benefit is available so profits are generally taxed as income and there may be National Insurance if there is a market for the shares.

As to share purchase arrangements, the Share Incentive Plan is an Inland Revenue-approved scheme which enables shares to be allocated to employees free of tax, and also allows employees to purchase shares with special reliefs. The disadvantage is that only £3,000 of free shares may be allocated to each employee in any year and the shares have to be held by trustees. Given the need for approval and a trust, this is the most expensive scheme to set up and run, but could yield good benefits if one puts in the effort. A disadvantage is that it cannot be focused on particular individuals, broadly everyone should be allowed to participate. Overall, it has not proved hugely popular.

Unapproved share purchase arrangements, however, have a lot to recommend them, if one accepts that share acquisition is the answer. The employee suffers the risk of buying shares only to see their price go down, but should, with a little care, only pay Capital Gains Tax on any profit. The main problem is that share purchase schemes seem to be regarded with suspicion by the Inland Revenue with the result that gains, in given circumstances, could be taxed as income. To make matters worse, if the shares are marketable, there may be National Insurance where there is an Income Tax charge, which is a cost on the employer although there are proposals to modify this. The days when one could just issue shares are gone but, with planning in advance, one should be able to manage the tax risk.

Overall, share schemes seem to be coming back to life and, if your company is suitable, could be a major incentive.

© RadcliffesLeBrasseur

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.