A Deferred Share Purchase Plan (DSPP) allows employees to become shareholders immediately without paying the full price of shares up front. It offers a tax efficient approach to employee share ownership in instances where approved arrangements may not be appropriate (for example, in order to provide awards to non-executive directors).
Under a DSPP, shares are purchased by employees for a small initial deposit. The remaining value is treated as a loan from the company, and is payable on a defined event such as a trade sale or a flotation. Any gains at this time will be subject to capital gains tax dependent the individual's personal tax rate (i.e. 18% or 28%).
Tax is payable on what would be the commercial rate of interest of the unpaid balance. The official rate of interest is currently 4%. The highest rate income tax is therefore 1.8% per annum for 2013/14 on the unpaid principal, and national insurance contributions are also payable.
If dividends rights are attached to shares, employees may be able to use dividend payments in order to pay off the remaining balance.
By offering employees shares on a deferred payment basis, employees who may not necessarily have the funds to purchase shares outright are enabled to do so. The DSPP also provides a method of offering tax efficient share awards in cases where either the company or the individual are not eligible for approved awards, such as non-employee consultants and NEDs.
The DSPP allows employees to immediately benefit from any potential rights that may be attached to shares. The rights attached to shares offered under a DSPP are discretionary so control can be retained over voting rights and the right to dividends.
If the price paid for shares is at least fair market value, there will be no income tax charge or National Insurance contributions payable by employees on acquisition of shares.
If employees meet the eligibility criteria for Entrepreneurs' Relief, they will benefit from a 10% tax rate on any gains, up to a maximum £10 million lifetime limit.
Discretionary performance and/or loyalty based conditions can be attached to the award of shares under a Deferred Share Purchase Plan.
As an unapproved share plan there are no restrictions surrounding a UK based company implementing a DSPP. Unlike alternative approved share arrangements, the DSPP can also be used to provide share awards to non-employees, for example non-executive directors and contractors.
This means this plan is often used as a tax efficient alternative in instances where approved share schemes are not available.
From the perspective of the employee participant, the disadvantage of a DSPP over, say, a share option plan, is that the DSPP is not a risk free arrangement. If the share value drops, the unpaid balance will be taxed as a benefit in kind.
In the worst case scenario (liquidation), the liquidator would call for the amount owing.
The cost will depend on how much help you are looking for. We would provide you with a cost after a free initial meeting. It is normally possible to give a fixed cost. We would not advise you to provide share incentives through DSPP unless the projected tax savings were significantly in excess of the professional costs.
If you would like a free consultation to discuss potentially implementing a DSPP, contact RM2 directly on 0208 949 5522, or email firstname.lastname@example.org.