UK: Flowering Shares

Last Updated: 12 February 2014
Article by Smith & Williamson

Flowering shares are shares which have a very low value initially but to which, subject to meeting performance hurdles, some or all future value of the issuing company accrues.

What is a flowering share?

A flowering share is usually a new class of share that receives value if a particular hurdle is met. For example if the current value of a company with one class of ordinary shares is say £10m, then a new class of ordinary share (say ordinary B shares) could be created which would receive all the company value in excess of the £10m figure. Dividend and voting rights on the B shares might be adjusted to keep their value at creation low, but the particular requirements of the share scheme and the company ownership circumstances would need to be considered.

Why use flowering shares?

The main benefit of using flowering shares is as a tax efficient incentive for employees. Their use can be structured so there is minimal income tax and NI on the grant of the shares to the employee and all future value in the shares becomes taxable at capital gains tax rates. Flowering shares can be used to increase the number of shares that can be granted under certain tax favoured schemes (such as CSOP and EMI schemes). If non-EMI shares are used, then it may be possible to structure the arrangement in such a way that entrepreneur's relief applies to the holding.

Similar benefits to flowering shares can be obtained by using flowering options, but this briefing note does not discuss arrangements involving flowering options.

How does a flowering share scheme work?

For an equity arrangement, the first step is to create a new class of share. This is typically done by splitting the ordinary shares into "A" and "B" shares. All existing shareholders will convert in this way. The "A" shares have rights to the current value of the company plus a small amount more; the "B" shares have rights only to the future growth above the amount attributable to the "A" shareholders. The increase in value over current MV is to take account of any hope value in the "B" shares. By setting the hurdle higher than current market value, the value of the "B" shares on reclassification should be low.

Once the "B" shares have been created they can be allocated (for shares say at par value) to the relevant employees. ITEPA 2003 s431 elections can then be made to fix the value attributable to the award for PAYE and NI purposes at the date of grant. All future gains will then be subject to capital gains tax in the hands of the individual.


Under both UK GAAP (current and FRS 102) and IFRS flowering shares 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 flowering share is accounted for as an equity-settled arrangement, the charge to the profit and loss account is calculated by reference to the fair value of the shares 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 flowering share arrangement 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.

In circumstances where an employee benefit trust is used to facilitate the arrangement, 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 a flowering share scheme award when there is an event chargeable to income tax on the employee, equal to the difference between the price paid (incurred by the employee associated with the award) and the market value of the shares on acquisition.

As noted above, where there is a cash settled put option, the settlement of the option may be a capital gains event for the company.

Income tax and NIC

On the award of shares there will be income tax on the difference between the market value of the shares at the time of award (assuming an ITEPA s431 election is in place) and any costs of acquisition incurred by the employee. If the shares are for companies which are listed, or where there is a market for the shares, income tax will be collected through PAYE and there will also be a national insurance liability.

Capital gains tax

A capital gains tax liability will arise when the employee disposes of the shares. The chargeable gain will be based on the sale proceeds less the price paid to exercise the option or acquire the share and the amount on which any income tax liability arose on exercise or acquisition, subject to the special rules for share cost 'pooling' where the employee also holds other company shares.

Entrepreneurs' relief (ER), providing a tax rate of 10%, on certain shares may be available where the ER conditions are met.

For whom is a flowering shares scheme suitable?

The use of a flowering share scheme 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 seeking to encourage share ownership through tax efficient share acquisition and enabling employees access to ER on their share ownership.

How we can help.

We can:

  • confirm that the legislative requirements to be satisfied on issuing share options are met;
  • draft scheme rules and customise these as applicable;
  • prepare supporting documentation including a tax memorandum and employee explanatory booklet;
  • assist in obtaining advance assurance from HMRC on the qualifying status of the company, if required;
  • obtain HMRC agreement on the valuation of the market value of shares at the award date;
  • deal with all HMRC reporting requirements; and
  • assist with the annual Form 40 return.

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2014

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