Growth shares are a separate class of shares that share only in the value of the company above a set hurdle, usually at or above its current value, so they are worth little when issued and an employee can pay full value for them or be taxed on a small amount. There is no special tax regime: the normal employment related securities rules apply, so any shortfall between market value and the price paid is taxed as earnings, leaver provisions usually make the shares restricted securities, and a section 431 election is normally needed to keep later growth within Capital Gains Tax. The real risk is the valuation, which HMRC does not agree in advance.

What is a growth share and how does the hurdle work?

A company creates a new class of share, often ordinary shares with limited rights, whose articles say that on a sale, listing or winding up the class receives a share of proceeds only above a stated amount, the hurdle. Below the hurdle the existing shareholders take everything. Above it, the growth shares take their agreed slice. If the hurdle is set at or above today’s value, the employee benefits only from value created from now on, which is why the shares are cheap at issue.

Because the growth shares are acquired by reason of employment, they are employment related securities. The company must register the arrangement on the ERS online service and report the acquisition on its end of year return, due by 6 July after the tax year, even for a one off award.

Why does the value at issue decide the tax?

If an employee acquires shares from their employment for less than market value, the difference is earnings under section 62 ITEPA 2003, the money’s worth charge, even if the shares cannot be sold. If the employee pays full market value, there is no Income Tax charge on acquisition, and later growth is normally a capital gain.

Market value is the price the shares might reasonably fetch on a sale in the open market (section 421 ITEPA 2003, applying section 272 TCGA 1992). For unlisted shares, section 273 TCGA 1992 assumes the hypothetical buyer has all the information a prudent purchaser would reasonably require. That information includes any exit plans, offers or trading forecasts the company holds, so a low value is hard to defend if a sale was already in discussion.

Why is valuing growth shares difficult?

A growth share has no value today in a simple sense, because the company is worth less than the hurdle. Its market value is a hope value: what a buyer would pay for the chance that the company grows past the hurdle before an exit. That depends on the hurdle level, growth forecasts, the likely timing of an exit, the size of the holding and the rights attached to the class. Option pricing models are commonly used, but the result is a judgement.

HMRC’s Shares and Assets Valuation team does not give post transaction valuation checks for Income Tax (Earnings and Pensions) Act purposes. It agrees values for EMI, SIP, CSOP and SAYE, not for an outright award of growth shares. The company and employee carry the valuation risk, and HMRC can challenge the value in an enquiry or employer compliance check years later. A contemporaneous written valuation by someone independent is the main protection.

How do the restricted securities rules apply?

Growth shares almost always come with leaver provisions, for example a bad leaver must sell at the lower of cost and market value. Under section 423 ITEPA 2003, shares are restricted securities if a provision allows forfeiture or a transfer at less than market value, limits disposal or other rights, or creates a disadvantage, and their market value is lower because of it. HMRC also gives restrictions on voting and dividends as examples.

For restricted securities, Chapter 2 of Part 7 taxes part of the value when a chargeable event happens: a restriction is lifted or varied, or the shares are sold to an unconnected person while still restricted (section 427). The charge uses a formula that taxes the proportion of value not taxed or paid for at acquisition, applied to the value at the later date. On an exit, that can turn part of the growth into employment income.

The usual answer is a joint section 431 election, which taxes the shares at acquisition as if unrestricted and switches off the later Chapter 2 charges. It must be made within 14 days of the acquisition and is irrevocable.

What other charges should be checked?

  • Unpaid or partly paid shares. If the employee pays less than market value and the shortfall is not taxed as earnings, Chapter 3C can treat the undervalue as a notional loan.
  • Artificially depressed value. Chapter 3A applies where value is reduced by more than 10% by things done other than for genuine commercial purposes, such as a main purpose of avoiding tax or National Insurance.
  • Artificially enhanced value. Chapter 3B charges increases of more than 10% caused by non commercial steps, such as moving value into the growth share class after issue.
  • PAYE and National Insurance. Any Income Tax charge is collected through PAYE with Class 1 National Insurance if the shares are readily convertible assets.

How does this work in practice?

Illustration only. A company worth £2 million issues growth shares to a senior employee entitling her to 10% of sale proceeds above a £3 million hurdle. An independent valuer puts the unrestricted market value of her holding at £5,000. She pays £5,000, and she and the company sign a section 431 election within 14 days as a protective step.

  • On acquisition there is no Income Tax, because she paid unrestricted market value.
  • Five years later the company sells for £8 million. Her shares receive 10% of £5 million, which is £500,000.
  • With the election in place the whole £495,000 profit is a capital gain, charged at the Capital Gains Tax rates for that year.
  • If HMRC later shows the shares were worth £20,000 at issue, the £15,000 shortfall is earnings for the year of acquisition, with PAYE and National Insurance if the shares were readily convertible.

How do growth shares compare with EMI or CSOP options?

EMI options and CSOP options have HMRC agreed valuations and statutory relief from Income Tax on exercise, but strict eligibility limits. Growth shares suit companies or employees who fall outside those schemes, or where the employee wants to hold shares now. Holding shares outright also starts the clock for Business Asset Disposal Relief, but outside EMI that relief needs at least 5% of the shares and voting rights and a 5% economic entitlement for two years, which a small growth share class often does not give.

What mistakes come up most often?

  • Issuing growth shares without a contemporaneous valuation, or using a stale valuation after sale talks have started.
  • Missing the 14 day window for the section 431 election, which cannot be extended.
  • Assuming a hurdle above today’s value means the shares are worth nothing.
  • Not registering the arrangement or reporting the acquisition on the ERS return.
  • Changing the rights of the class later without considering the restricted securities and Chapter 3B charges.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.