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Tips on gifting or transferring shares to employees

View profile for Louise Hebborn
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Tips on gifting or transferring shares to employees

It is common for businesses to offer shares to senior employees. Gifting shares to employees can be a reward for senior employees who are integral to the success of the business. Clearly businesses who incentivise staff in this manner are more likely to have motivated and loyal senior management teams, however motivating employees in this way can also provide a management team who over time will be ready to buy the remaining shares, and so help the company’s succession planning. 

  1. Consider whether the employee should be gifted shares, transferred shares at an agreed price or a reduced price, or allotted new shares.  The structure and way that the shares are treated will have tax implications, which will require advice and consideration. 

  2. Get early tax advice ideally before any plans are made, but essentially before any shares are transferred or allotted.  The transfer of existing shares will have tax implications for both parties, and the allotment of new shares may also be classed as a benefit to an employee and subject to tax. Your tax advisor will advise on how best to structure the new shares and the options available to you.

  3. Think about what rights the shares should have attached to them. It may not be appropriate that the employee shares have voting rights or equal dividend rights as the majority shareholders. You can tailor the type of shares with appropriate rights to suit the circumstances fairly easily usually by amending the company’s Articles of Association.  Sometimes different share classes are used for different levels of types of shareholdings.

  4. If you want to incentivise employees to work towards the sale of a business or the shares are linked to performance then an employee share scheme may be appropriate. Various different types of employee share schemes exist, some of which have tax advantages, for example an EMI type scheme. An EMI scheme is only appropriate for companies with assets of £30 million or less, for shares up to a value of £250,000, and for employees that work more than 25 hours per week or if less 75% of their working time or more is devoted to the company.  Its important to note that certain sectors, such as the banking and the legal profession are excluded from setting up EMI scheme for employees. These can be complex to set up and your tax advisor will be best placed to contact HMRC to set up the scheme.

  5. Before you gift or transfer over the legal ownership of any shares to an employee a shareholders agreement should be entered into.  A shareholders agreement is a private agreement between the shareholders. If you have one in place already then it should be revisited to ensure that it covers minority shareholders. This will prescribe what should happen to the shares if an employee leaves the business. Good and bad leaver provisions can be included to allow for a compulsory transfer of shares in certain circumstances (for example if the employee leaves), and only the subscription value be paid if an employee is dismissed or leaves within a certain period of time. Appropriate terms should be tailored to your circumstances. 

  6. Think about what the plans for the company are. If an exit strategy is being considered, then it is imperative that all the shareholders sell together, it’s unlikely that a buyer will want to buy only 80% of the shares for example. Provisions in the articles or shareholders agreement can be introduced to ensure that the employee shareholders must also sell their share for the same value per share as the majority shareholders if an offer is made and accepted by an agreed majority.

Giving employees shares can be complex and it is wise to seek professional advice before doing so. If you would like to speak to a member of our commercial law team to discuss your requirements please call us on 0161 696 6170 or complete our online enquiry form and we will contact you directly.

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