When a director starts their first business, share ownership is often the clearest indication that they own a stake in the company. Shares not only represent ownership but also determine voting rights, influence over business decisions, entitlement to dividends, and ultimately the proportion of any future sale proceeds the shareholder may receive.
One common trend we have observed over the years is recruitment agency owners offering shares to top-performing employees or senior staff members to incentivise and reward them. While this can appear to be an attractive benefit, it can sometimes create unintended consequences for both the business and its existing shareholders.
A former business partner once said:
“It’s easy to give away shares, but much harder to get them back.”
In many cases, this proves to be true unless the appropriate protections are put in place from the outset.
By transferring shares to another party, existing shareholders may be reducing their voting power, decreasing their share of future profits, and ultimately diluting the proceeds they would receive if the company is sold.
Furthermore, if an employee leaves the business and the shares need to be repurchased, any increase in the company’s value could result in a significant financial cost to both the business and its shareholders. For this reason, the decision to transfer shares should always be carefully considered.
Understanding How Shares Are Transferred
The first consideration is how shares will be provided to a potential shareholder.
Each share has a value based on the valuation of the company. As a result, shares are typically sold by the existing shareholder and purchased by the employee. The main exception is the gifting of shares to spouses or close family members, although independent tax and accounting advice should always be sought before proceeding.
For a newly incorporated business with little or no value, the cost of acquiring shares may be minimal.
However, where a company has an established trading history and generates profits, any share transfer will normally be based on an independent valuation of the business. The purchase price will be determined by the percentage of shares being transferred and the agreed company valuation, which may require HMRC clearance depending on the circumstances.
There are numerous factors involved in valuing a business, so professional advice is strongly recommended.
Tax and Financial Considerations
The method used by an employee to purchase shares also requires careful planning.
The existing shareholder may need to declare the disposal on their personal tax return and could become liable for Capital Gains Tax. In addition, stamp duty may be payable on the transfer of shares.
If shares are transferred to an employee at below market value, HMRC may regard the difference as an employment-related benefit. This could result in PAYE tax and National Insurance liabilities arising for both the employee and the business.
What initially appears to be a simple reward can therefore have significant tax implications if not structured correctly.
Protecting the Business
Where shares are transferred to employees, it is often advisable to create a separate share class with specific rights attached.
These rights should be clearly documented within the company’s Articles of Association and properly registered.
Alongside this, businesses should strongly consider implementing a Shareholders’ Agreement. This agreement should set out:
- Dividend policies
- Voting rights
- Rights on a company sale
- Good leaver and bad leaver provisions
- Share transfer restrictions
- Dispute resolution procedures
A professionally drafted Shareholders’ Agreement can help protect both the company and its shareholders while providing clarity for all parties involved. As businesses evolve, these agreements should be reviewed periodically to ensure they remain fit for purpose.
Common Challenges
Even where all parties agree that transferring shares is the right approach, practical challenges can arise.
Employees may not have the funds available to purchase shares at market value. Shareholder agreements may be overlooked or inadequately drafted. HMRC may challenge valuations that appear unrealistic or unsupported.
Collectively, these issues can turn what seems like a straightforward incentive into a complex and potentially costly exercise.
Alternative Ways to Reward Key Employees
Before transferring shares, recruitment agency owners may wish to consider alternative incentive structures.
Profit-Related Pay
Rather than receiving dividends through share ownership, employees receive a bonus linked directly to company profitability.
Although the employee will pay PAYE and National Insurance on the bonus, existing shareholders retain full ownership and control of the business. If the employee leaves, there is no need to buy back shares or unwind ownership arrangements.
Enterprise Management Incentive (EMI) Schemes
An Enterprise Management Incentive (EMI) scheme is a HMRC-approved share option plan that allows eligible employees to acquire shares in the future at a predetermined price.
EMI schemes can provide significant tax advantages while giving employees a genuine stake in future growth. In many cases, employees do not need to invest capital upfront, and unexercised options are typically forfeited if they leave the business.
Growth Shares
Growth shares allow employees to participate in the future growth of a business without benefiting from the value that has already been created.
A current company valuation is established, and the growth shares only deliver value if the business exceeds that valuation in the future. This can make the shares more affordable to acquire while still aligning employees with long-term business growth and value creation.
Thinking About Rewarding Key Employees?
Before transferring shares in your recruitment agency, it’s important to fully understand the legal, tax, and commercial implications. A poorly structured arrangement can create unintended costs and complications for both the business and its shareholders.
MAYACHI works with recruitment business owners across the UK to design effective reward strategies that support growth, retention, and succession planning.
Book a free two-hour MAYACHI consultation to discuss your objectives and explore the most appropriate way to reward and retain key employees while protecting the long-term interests of your business.
