Deferred Share Purchase Plan (DSPP)
A Deferred Share Purchase Plan allows companies to offer share ownership on advantageous terms.
The employee contracts to purchase the shares outright at fair value as agreed with HM Revenue & Customs. However the amount paid initially is nominal; the remainder is payable at some defined time or event, such as a sale or flotation of the company. Shares awarded under a deferred share option plan can clawed back if loyalty and/or performance conditions are not met.
Downloand the free Deferred Share Purchase Plan fact sheet
Beneficial capital gains treatment
Gains are treated as capital not income. The tax on gains in a Deferred Share Plan will therefore be just 18 per cent. or as little as 10 per cent. if Entrepreneur’s Relief can be claimed.
The recipient may use dividends or bonuses during the holding period to pay down the outstanding capital. While the unpaid balance remains outstanding it is treated as an interest free loan. A small annual tax charge may arise on the “benefit” of this loan but this is usually waived for senior directors.
Shareholder risk
Unlike a share option, a Deferred Share Purchase Plan is not risk free. If the shares fall in value or the company fails, the participant could be left with liability in respect of any unpaid balance. In some cases, employers regard this risk element as desirable.
A Deferred Share Purchase Scheme can contain loyalty and performance conditions in the same way as a share option, so that the participant will lose any potential benefits if the conditions are not satisfied.
You may download our factsheets on the above subjects, view our online Directors’ Guide or ask for a free consultation.
