Incentive plans for unlisted companies

Providing effective incentives to their key employees is often vital to the growth prospects of unlisted companies. Although the Government has not created a tax-advantaged share plan specifically for unlisted companies, there are many different ways that they can incentivise management and employees.

Common issues for unlisted companies

As there is generally no’ market’ for the shares in an unlisted company, the approach to valuing the company’s shares will be vital. Another complexity is that the unlisted company is often targeting a liquidity event - such as an initial public offering of its shares or a sale of the business. Therefore, the design of the incentive needs to take into account factors such as vesting arrangements and performance criteria or liquidity. In most cases, detailed scenario planning is required before an incentive plane is created to ensure that its overall impact for all of the stakeholders is positive.

The tax treatment of the share scheme is likely to be a major concern for an unlisted company. For example, where the business has high potential growth, there is a greater opportunity to benefit from the lower capital gains tax rates compared to income tax rates. In addition, some of the structures that result in future gains being subject to capital gains tax are a better fit in the unlisted company.

Share plans

Enterprise Management Incentive share options (EMI) has qualifying conditions intended to target growing, entrepreneurial, early stage businesses. Such companies are often unlisted; therefore, EMI remains the simplest and most tax-advantageous scheme structure for those companies that qualify.

Where EMI is not available, the Company Share Option Plan (CSOP) is a useful alternative share option scheme with many tax-advantages. However, CSOP has certain qualifying conditions relating to restrictions on shares so it is not always a feasible approach for the unlisted company. Read more on CSOP.  

If EMI and CSOP are not available, there are a number of other structures that may give a more attractive tax treatment than simple non-tax advantaged share options. These include growth shares, flowering shares, joint share ownership plans and partly paid shares. All of these arrangements allow employees to acquire an interest in shares on the date of award and be subject to capital gains tax on a subsequent sale or floatation.

Where the tax treatment of an incentive plan is not a main driver, a simple non-tax advantaged share option can provide the simplicity that is desirable for all parties. Overall, deciding on the best share incentive plan for your company requires a holistic approach taking into account many variables including the tax position of both the company and all participants.  

See our share incentives hub.

For help and advice on creating the right incentive plane for to help your business grow, please contact Andy Goodman or Matthew Emms.