Take 1 minute to see the value of EMI Options and Growth Shares

1 simple way to compare EMI Options with Growth Shares

Growth shares (G shares) are a great way to incentivise key employees. They are great for UK limited companies because they can be used in any type of business, with no restrictions. 

G shares only share in the capital growth of the business from the point that they were issued. These special shares only have value when a specific target (or hurdle) is met, usually at an exit event exceeding a set price.

Try our simple EMI Option Vs. growth share calculator below

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Your company is currently valued at £1 million. 

You want to offer one of your key team members, Sarah 10% ownership through Growth Shares. 

The hurdle is set at a sale exceeding £1 million.

  • Your business is later worth £3.5m.
  • You, the owner, get the first £1 million.
  • Sarah gets 10% of the remaining £2.5 million (£250,000).

G shares are issued at a hurdle, they will only share in any eventual net sale proceeds above £1 million. This means that existing shareholders are only diluted for growth from that point, rather than the existing worth of the company. 

The purpose of using growth shares is to minimise the risk of Sarah being exposed to income tax on when the shares are awarded.

You need to make sure that the shares are issued at a hurdle. This is a rate above the current business valuation that would satisfy (in HMRC’s eyes) the growth shares being issued, and the gain on these shares being subject to capital gains tax and not income tax. This is also known as ‘hope premium’.

Using the example above, if you set a 10% hurdle (or hope premium), Sarah would benefit from the growth of the business above £1.1 million (£1 million + 10%).  

Typical hurdle rates can be between 10-30% above the current business value – then Sarah is only exposed to capital gains tax on the eventual sale of the shares. 

If Sarah receives dividends on those shares, they would be taxable in the normal way as dividend income.

The valuation of a business for HMRC purposes is not an exact science. You can use our quick business valuation calculator here for guidance.

It is also not possible to get HMRC to pre-approve a valuation for a growth share scheme, but we can assist in creating your hurdle valuation, which you can use to issue growth shares. 

All companies differ in what an appropriate hope premium would be, but it would likely be somewhere between 10-30% above your current business’s value.

This reflects the ‘hope value’ of the shares and helps to mitigate any risk of HMRC retrospectively deciding that the growth shares were issued at an undervalue.

The difference between any undervalue and the determined business value at that time would create an income tax charge. 

If HMRC did determine that the shares were undervalued, they would charge Income tax on any differential between the hurdle and their determined market price at the time.