Flowering Shares

Service overview: Flowering shares – employee incentives solicitors

  • Flowering shares can be used as employee share schemes. Usually a form of growth share, they’re realisable on the achievement of specific performance conditions – such as exceeding a profit target for a future accounting period or exceeding a minimum exit price, (referred to as ‘flowering’). At this point capital gains tax may be payable.
  • Flowering share schemes are not HMRC tax advantaged equity-based employee incentives, i.e. they do not need to meet specific legal requirements to provide tax reliefs. They are sometimes similar to hurdle shares and growth shares, the names being interchangeable to a certain extent.
  • Employees awarded flowering shares benefit by becoming shareholders with little personal financial cost.
  • As flowering shares are outside of the approved HRMC tax advantaged share scheme requirements, they offer considerable flexibility to employers.
  • Existing employee shareholding is not immediately affected by dilution.
  • When considering share incentive schemes, there are several routes available, including non-tax advantaged, and HMRC tax advantaged arrangements like EMI options. We’ll recommend the best approach based on your location, business type, stage of growth, and objectives.

What we do: Flowering shares legal advice

Flowering shares, like other equity-based share plans, offer an effective and tax-efficient way to incentivise key employees where HMRC tax-advantaged schemes like EMI schemes cannot be used. They can also be combined with other types of shares.

Harper James’ employee incentives solicitors have the specialist business, commercial, legal and taxation knowledge to explain the implications of flowering share schemes for your business, and to help implement any chosen arrangement. Before doing so, we will take the time to listen to your financial and business strategic goals to ensure any guidance we offer aligns with your objectives.

Due to the various types of share incentives available, including HMRC tax advantaged and non-tax advantaged schemes, it is important to seek expert advice to ensure that your business is using the most appropriate model which is as tax efficient as possible while achieving its intended aim.

We’ll advise on:

  • The most suitable type of employee share schemes for your situation, including other non-tax advantaged arrangements like growth shares, hurdle shares, and phantom shares, as well as HMRC tax advantaged schemes like EMI share options.
  • Valuation of the shares
  • Implementing and administering the scheme
  • Combining flowering shares with other types of shares for maximum benefit

About flowering shares

For businesses whose intention it is to grow to a set target and then to exit, flowering share schemes offer an excellent way to incentivise key staff members to remain with the company through the journey, at which point they can reap the rewards of their efforts and loyalty. Flowering shares are not subject to the same requirements as HMRC tax advantaged schemes like EMI share options. However, if you do qualify for EMI schemes, you could also combine them with flowering shares.

The idea is that employees who are offered flowering shares (typically at a low value as early in the life of the company) do not immediately become shareholders with the intrinsic voting and capital rights this offers – this only occurs on achievement of a specific target, such as exceeding a profit target for a future accounting period or exceeding a minimum exit price. This means that for existing shareholders, their shareholding is not immediately diluted, therefore ensuring the interests of founders and early employees are not negatively impacted. Flowering share schemes can even be set up to ensure that holders only ever own a share of the new growth achieved or growth in excess of a target amount, providing even greater protection to existing shareholders.

One of the key benefits of flowering shares for employees is that they can become shareholders with little financial investment (in terms of the purchase cost and/or the tax payable). Furthermore, they will only be expected to pay capital gains tax in the event the shares gain value and the set threshold target is reached.

HMRC tax implications

  • On award, if the employee pays less than the market value of the flowering shares they will be required to pay HMRC income tax based on the market value of the shares less the price paid
  • When sold, Capital Gains Tax (CGT) will be payable on any increase in value (at 20% or 40% depending on whether the employee is a higher rate taxpayer), less the annual CGT exemption
  • CGT may be lowered to 10% if entrepreneurs’ relief is applicable
  • Flowering shares are considered tax efficient for both employee and employer

Flowering shares can also be made subject to forfeiture should the employee leave the company. Furthermore, flowering shares can be combined with EMI options, allowing the company to leverage further commercial and tax advantages.

If you need an introduction to share schemes and which ones might be best for your business, don’t forget to read our advice What are employee share schemes and how do they work?

Who we help: High-growth businesses, startups, SMEs and large businesses

We regularly help start-ups, SMEs and high-growth businesses incentivise their staff through employee share schemes, as well as investors and entrepreneurs. Flowering shares are most suitable for high-growth companies with an exit strategy.

Start-ups and high-growth companies are a major focus for our firm so we are highly experienced in guiding them from formation through to successful exit, and we appreciate how incentivising employees along the way can aid this ultimate goal.

Why choose flowering shares and our employee incentives solicitors?

We’re a modern law firm with a difference. Our innovative remote operating model means that you can access expert City-grade legal advice from partner-level solicitors at a fraction of the cost of traditional law firms. Our solicitors have all been recruited from top 100 UK law firms or large international businesses. Find out more about our employee incentives lawyers here:

Pricing plans

Our three transparent pricing packages are designed to give you the widest possible access to high-quality legal advice, whatever the size and nature of your business:

City

Straightforward access to senior solicitors at a competitive rate.

An affordable solution for businesses needing one-off legal support. Receive ‘City’ partner-level expertise at a fraction of ‘City’ prices.

Enterprise

Have legal peace of mind for £189 per month with additional support from £99 per hour.

A monthly subscription legal support package specifically designed for start-ups and smaller businesses.

On-Demand

For businesses requiring 60+ hours of support a year, with prices equivalent to £99 per hour.

Fully account managed quarterly subscription service for businesses with more complex legal needs.

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