Flowering Share Plans

Flowering shares provide an opportunity for employees and directors to acquire equity in their employing company. A flowering share is acquired by the employee and delivers value to the employee only if the value of the company exceeds a set threshold. Returns to employees from flowering shares are subject to capital gains tax (CGT).

How flowering share plans work

The company creates a new class of share. The rights given to this new class of share are such that if the equity value of the company is below a given threshold, the shares rank for minimal economic returns. If the value of the company is above the threshold, the shares rank equally with ordinary shares. They are similar to [link to] growth shares in many ways, but rather than just delivering a proportion of the increase in the value of the company above the fixed hurdle, once the hurdle has been exceeded the flowering shares will rank for value above and below the fixed hurdle in the same way as an ordinary share in the company. Therefore, flowering shares are more valuable than growth shares on an exit and thus have a higher market value on acquisition.

For valuation purposes, as the flowering shares only receive economic returns if the hurdle is met, the initial value of the flowering share is usually materially lower than ordinary shares. Therefore, the flowering shares can be issued or transferred to employees for a relatively low issue or purchase price (or a relatively low initial tax charge if the flowering shares are acquired for no consideration).

Flowering shares can be subject to restrictions on transfer, or forfeiture if specified conditions or targets are not achieved or the employee ceases employment. They form part of the share capital of the company and are therefore governed by the company’s Articles of Association and subject to the same provisions as other shares on the sale of the company including tag and drag provisions.

The growth in the value of the flowering shares is subject to CGT which is more attractive than income tax and NIC (employee and employer) that would apply to a cash bonus arrangement or non-tax advantaged share options. This offers a significant benefit to employees and the employing company in high growth companies.

How it works: Example

A new class of share in a Company is created which is entitled to 10% of the proceeds on sale of the company, if the company is sold for in excess of £7.5m. If the company is sold for less than £7.5m, the flowering shares have minimal rights to proceeds.

The flowering shares are valued. Due to the £7.5m “hurdle”, the value of the flowering shares at subscription is, say, £20,000 and the employee buys the flowering shares for the market value. Alternatively, the employee may receive the flowering shares for no price and pay income tax on the £20,000 initial market value.

If the company grows in value and is sold for £10m, the value of the employee’s flowering shares is 10% of the £10m value - £1,000,000. If the company value does not exceed the £7.5m hurdle, the employee gets nothing.

Benefits of flowering shares

As with all employee share plans, because the participant becomes a shareholder, their interests are aligned with the success of the company. In addition:

Flowering shares are versatile, tax-efficient arrangements that can allow employees to acquire low-cost shares when HMRC approved plans are not appropriate
The amount by which the disposal proceeds exceed the base cost of the flowering shares (i.e. the acquisition price + the amount you are subject to tax on the acquisition of the flowering shares) will be subject to CGT rules, which is more attractive to employees than income tax and NIC
Flowering shares can be used with HMRC tax-advantaged EMI options, combining their commercial and tax benefits
Flowering shares are commercially flexible and, when used outside of tax-advantaged share plans, there is no value cap on flowering shares that can be acquired.

Who can use flowering shares?

Flowering shares are most commonly used by private companies, including by start-ups and private equity backed companies where there are substantial growth prospects. As flowering shares require a new class of shares to be created, they will not generally be appropriate for UK listed companies. However, flowering shares may be created in a subsidiary of a listed company so that, subject to meeting vesting conditions or performance targets, the flowering shares can be exchanged for shares in the listed company - giving employees a realisable asset. EIS businesses must be cautious when implementing flowering shares to ensure that the shares do not affect the EIS tax reliefs.

On award of the flowering shares:

The employee pays income tax on the value of the flowering shares on the date of receipt, less any amount paid for the shares. This would require formal valuation input and, depending on share rights, the tax value could be relatively small. Restricted securities tax elections will normally be entered into.

On disposal of the shares:

On disposal, CGT at a rate of 24% should apply to any gain arising for the employees. A tax rate of 10% would apply if the conditions to claim Business Asset Disposal Relief (BADR) were met, read more here. Although the BADR rate is increasing to 14% from 6 April 2025 and to 18% from 6 April 2026, there still remains a differential to the main CGT rate.

Corporation tax and accounting

There will usually be no corporate tax deduction available for the costs of the arrangement. Subject to auditor agreement, a flowering Share plan should result in an FRS 20/IFRS 2 accounting charge based on the fair value of the flowering share awards.

Example of tax advantages

The worked example below contrasts a non-tax-advantaged long-term incentive plan with flowering shares and shows that an advantageous employee tax and NIC result can be achieved.

In this example, 1m shares are subject to the option, the starting share price is £5 and price at vesting is £10. There is no exercise price for the non-tax-advantaged share option.

A participant acquires 1m flowering shares. The rights of the flowering shares entitle the holder to participate in 10% of the company value if the exit value of the company is more than £7.5 million. After three years, the company is sold for £10 million. There are 9m ordinary shares in issue meaning that the flowering shares receive 10% of the £10m exit proceeds. The participant is subject to income tax and NIC on the market value of the shares (£20,000, which is equal to the unrestricted market value of the flowering shares at the date of acquisition).

	Non-tax-advantaged share options	Flowering Shares
Employee
Number of shares under award	1,000,000	1,000,000
Income tax and employee’s NIC on grant at 47%	Nil	£9,400
Income tax and employee’s NIC on exercise / vest at 47%	£470,000	Nil
CGT on sale at 24%	Nil	£235,200
Total employee tax cost	£470,000	£244,600
New sale proceeds due to employee after funding exercise price and tax	£530,000	£755,400
Employer
Employer’s NIC at 15% (rate applying from 6 April 2025)	£150,000	£3,000
Corporation tax relief at25% (on amounts subject to income tax and on employer’s NIC)	(£287,500)	(£5,750)
Net employer tax cost	(£137,500)	(£2,750)

*CGT figures include a deduction for the base cost but ignores the annual exemption other reliefs.

Other uses of a flowering share plan

As well as being used for employment reward and planning, flowering shares can be used for effective inheritance and succession planning. Instead of awarding flowering shares to employees, those shares potentially could be given to family members, directly or through a trust arrangement, for the next generation.

This has the effect of transferring all or part of the value of the company to family members. The value of the gift will be limited for inheritance tax purposes. This is particularly useful in cases where a shareholding would not qualify for inheritance tax business property relief (such as shares in investment companies). Read more about IHT business relief here.

Expert advice on Share Plans and Incentives

Despite the increase in (a) employer’s NIC to 15% (from April 2025); (b) top rate of capital gains tax to 24%; and (c) Business Asset Disposal Relief to 18% (by April 2026), share-based incentives option plans remain an extremely attractive way to retain and incentive key employees in a tax efficient way which can be aligned with the company’s key commercial objectives.

If you have any questions about flowering shares, or any other share plans for your business, please get in touch – our team of specialists will be happy to help you.