What are growth shares?
Recently there has been a bit of noise in the press about growth shares. Some recent articles suggested that gworth shares are a golden bullet to avoid Inheritance Tax. Unfortunately, nothing in tax is simple or straight forward especially if tax avoidance is at the heart of the choices being made.
We asked our tax team a very relevant question, what are growth shares? and how are growht shares legitimately in a company?
In short, growth shares are a separate class of shares that only accrue value if the total value of the company exceeds an agreed hurdle. For example, if you set a hurdle at £10m and the company is sold for £15m, the first £10m of proceeds will accrue to other company shares first, whilst the growth shares will only share in the proceeds in excess of £10m i.e. £5m.
This means that should the sale consideration be less than £10m, growth shares owners will not participate in the sale proceeds at all.
The value over the hurdle may be shared in various ways: 50/50 between ordinary and growth shares, 20/80 or any other agreed ratio, which is then documented in the company’s Article of Association.
What are growth shares? How are growth shares used?
Growth shares are a commonly used as an employee incentive tool. They are either awarded as issue of shares or options over the growth shares.
The premise is that to participate in the future sale of the company, a certain agreed hurdle must be reached, for example, you may wish the employees to only participate in the future growth of the company.
Growth shares may also be used as part of family succession planning. You may wish to involve your children in the management of the business, again though you would like to retain the value built up in the company for yourself and have them participate in the value growth they build. In this instance, you would set the hurdle to be the current value of the company.
For any of the above planning to achieve its goals, it is important to have a valuation of the growth shares that HMRC will find acceptable.
Growth shares will have an intrinsic “hope” value; therefore, it would be hard to argue that they are worthless when they are issued to your employees or family members, particularly if they had an entitlement to dividends as well.
With any area of tax planning you should always seek professional advice. it is essential that a professional carries out the valuation of your company and that they agree the value of the growth shares with HMRC. It is important to remember that in relevant cases you are required to report to HMRC and taxes must be paid as a result of the share issue.
If you are asking yourself, what are growth shares? and if you would like to speak to a member of RPGCC’s tax team regarding growth shares, how growth shares are used or indeed any are of tax, please contact us or telephone us on 020 7870 9050 where a member of our team is waiting to help.
