In today’s competitive business world, attracting and retaining top talent can be one of the biggest challenges for growing companies.
While benefits like medical insurance or bonuses are still popular, many businesses are now looking for more creative ways to reward key employees — especially when Enterprise Management Incentive (EMI) schemes aren’t an option.
One increasingly popular solution is the use of growth shares.
What Are Growth Shares?
Growth shares are a special class of ordinary shares created by a company to reward employees, directors, or family members — but only if the company’s value grows beyond a certain threshold.
This makes them a powerful incentive tool. Employees only benefit if they help increase the company’s value, meaning everyone’s goals are aligned.
Because they’re designed around future growth, growth shares allow businesses to reward team members without diluting the value already created by existing shareholders.
A variation known as “flowering shares” goes one step further — these only provide value if the company hits specific performance targets, such as profit milestones.
How Do Growth Shares Work?
When a company issues growth shares, it sets a ‘hurdle rate’ — a benchmark for performance, often based on a future company valuation or return on investment.
Only once the company exceeds this hurdle do the growth shareholders benefit from any increase in value.
Typically, growth shares:
- Don’t carry voting rights or dividends until the hurdle is met
- May include performance conditions (such as staying with the company for a set period)
- Become valuable when there’s a liquidity event, such as a sale or employee exit
This structure ensures that growth shares reward long-term performance and loyalty, rather than short-term gains.
Tax Implications of Growth Shares
The tax treatment depends on how the shares are issued:
- At market value: No income tax or National Insurance (NIC) is due initially, since the shares are worth little at the time they’re granted.
- At a discount: The discount is treated as employment income, and income tax/NIC may apply.
When the shares are sold, any gain is subject to Capital Gains Tax (CGT) at the usual rates — 18% for basic rate taxpayers or 24% for higher and additional rate taxpayers.
However, if the conditions for Business Asset Disposal Relief (BADR) are met, the CGT rate drops to 14% for disposals in 2025/26 and 18% after 6 April 2026.
To qualify for BADR, the following must apply:
- The company must be a trading company.
- The shareholder must be a director or employee.
- They must have held at least 5% of the share capital and voting rights for two years before the sale.
- They must be entitled to at least 5% of profits or sale proceeds.
HMRC’s View
HMRC takes a cautious stance when valuing growth shares. They must be realistically valued — not assumed to be worth nothing simply because there’s a hurdle in place.
The hurdle must genuinely exceed the current market value, and any discounts must be clearly justified. HMRC will usually expect a formal share valuation and supporting documentation before approving an arrangement.
Practical Considerations
Before issuing growth shares, companies must:
- Obtain a formal valuation from a qualified professional
- Amend their articles of association, if necessary
- Prepare a subscription agreement for each shareholder
Handled correctly, growth shares can be a tax-efficient, motivational, and fair way to reward key contributors for helping your business grow.
Final Thoughts
Growth shares aren’t just for large corporations — they can be a powerful tool for ambitious SMEs too. By linking rewards directly to company performance, they help drive engagement, loyalty, and long-term value.
If you’re considering growth shares or want advice on structuring your rewards scheme, contact Jon or the team at Jon Davies Accountants.
We’ll help you design a tax-efficient plan that benefits both your people and your business.
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