PINSENT MASONS ExSOPTM
An Overview
William Franklin
ExSOPTM
•
The ExSOP™ is a new form of share plan that Pinsent Masons
developed around 5 years ago. We believe that, in appropriate
circumstances, the ExSOP™ has clear advantages over
conventional share plans.
•
Although Pinsent Masons developed the ExSOP™ concept, the
idea has been picked up by other advisers and is being marketed as
a “joint-ownership” or “shared-ownership” share plan.
•
We have implemented ExSOP™ for over 15 companies including
fully listed companies, 3 AIM companies and unquoted companies.
Additionally, ExSOP™ has been implemented for what is one of the
UK’s largest (and most high profile) private companies.
ExSOPTM (cont)
• Shares are acquired jointly with an employees' trust. These are
owned jointly, but in unequal proportions, by the trustees (own
original value) and the employee (owns the right to any growth in
value). The employee therefore owns an interest in the shares from
the outset.
• As the ExSOP™ has a funding cost (the cost of acquiring the
shares) the employee’s interest is also reduced by a notional
interest cost. The result is that the employee's interest is the right to
any growth in value less, say, a 4% p.a. notional interest charge.
ExSOPTM (cont)
• After a period (say 3 years) the employee can call for the shares
held by the trust to be sold. The sale proceeds are then split
between the employee and the trust according to their proportional
ownership.
• As the employee is selling his interest in an actual share this is a
capital gains disposal and not an income tax event.
• The interest acquired by the employee at the outset has an initial
value on which income tax and NICs (employer and employee) must
be paid. The value of this interest should be agreed with HMRC.
Depends on circumstances but in practice this has resulted so far in
valuations of up to around 5%-10% of the underlying value of the
shares.
Advantages
• ExSOP™ can deliver significant tax benefits for participants
compared to conventional share option plans – effective 18% tax
(CGT) on growth, as opposed to 41% tax (IT and NICs) plus
employers NIC (18% v 49%).
• Profit and loss charges under IFRS2 should be no different than for
traditional share options (there is potential for lower charges, but
requires negotiation with auditors).
• ExSOP™ can have comparable commercial terms to those available
under traditional share options (leavers' rights, performance
conditions etc).
Advantages (cont)
• Pinsent Masons' technical analysis has been confirmed by leading
Counsel, and HMRC have in relation to one client confirmed the tax
position via a COP10 ruling.
• Pinsent Masons has had confirmation from HMRC that ExSOP™ is
not a matter requiring disclosure under the tax avoidance schemes
disclosure regime. No special individual tax avoidance disclosure is
required by individuals.
Other Considerations
• As with share options, ExSOP™ delivers no value unless the share
price rises. Accordingly, it does not have the capacity of an LTIP
(long-term incentive plan) or similar plan to capture the values of
shares at grant (unless linked with another plan which delivers the
day 1 value but without ExSOP™ tax breaks).
• ExSOP™ will require all of the award shares to be held in an
employees’ trust from the date of "grant". Therefore, ExSOP™ will
tie up an amount of capital.
Other Considerations (cont)
• As the employee will have an interest in the award shares from day
1, consideration should be given to the rights that will attach to the
shares (eg voting rights).
• ExSOP™ is technically complex compared to other arrangements.
It involves the use of an employees' trust and a detailed joint
ownership agreement between the individual and the trust.
Participants will need to understand the potential tax advantage in
order to "buy-in“ and risks.
• ExSOP™ involves paying an amount of income tax at the time an
award is made (typically 5%-10% of the value of shares). This will
not be refundable even if the ExSOP™ does not deliver value
because share price does not rise.
Other Considerations (cont)
• HMRC are not bound to accept a valuation proposal in any case.
Private company and non-LSE listed company valuations can be
complex, either because there is no “listing” for the shares and/or
other valuation inputs may be difficult to establish. External factors
(e.g. movements in valuation inputs) can influence actual valuations
achieved and the size of the initial tax charge.
• As ExSOP™ is not a share option plan, the statutory corporation tax
deduction often available for such plans will not be available in
relation to the "gain".
Other Jurisdictions?
• Switzerland

• Spain
Probably
• Italy
?
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