Joint Share Ownership Plan (JSOP)
The Joint Share Ownership Plan (JSOP) was first developed in 2002 by William Franklin and David Pett (a founding Partner of Pett Franklin who stepped down from the firm in April 2017) and has been widely and successfully used ever since.
The concept is as follows:
- An employee, together with a third party, the “co-owner” (e.g. a parent company or employees’ trust) jointly acquires the entire beneficial interest in shares.
- The co-owner and the employee both own the entire interest in the share from the outset, although normally the shares will be legally held by the co-owner on trust (not unlike a nominee arrangement).
- However, the co-owner and the employee each sign a “joint ownership agreement” setting out how the proceeds of sale will be split between then when the shares are eventually sold.
- This will give the employee a right to participate only in value above a fixed threshold, while the co-owner continues to hold the existing value (plus a small “carrying cost”) – so the employee receives only the growth in value.
JSOP interests can be performance-linked and are normally subject to forfeiture if an employee leaves (other than for specified “good leaver” reasons).
Using a JSOP
The legal structure is very different, but in economic terms JSOPs bear many similarities to growth shares. JSOPs are however often a better choice for listed companies, for whom creating a separate class of share can be complex and difficult.
The employee will be charged to income tax on the value of their JSOP interest at the time they receive it. This will normally be very low – a JSOP interest only becomes valuable as the company grows and its share price rises. The growth in value will then be charged to capital gains tax in the hands of the employee on realisation.
The example above has been set out in terms of a sale of the shares but it is worth noting that a realisation event could equally involve an exchange of interests by the employee and the co-owner, so that each ends up with ownership of a number of whole shares representing the value to which they are entitled.
JSOPs are a well-established form of incentive and are likely to be comfortably accepted by institutional shareholders provided the value awarded is adjusted appropriately to take account of the tax benefit to the employee and, correspondingly, the reduced corporation tax relief to the company. The overall cost of providing JSOP incentives to a company should therefore be lower than conventional share options and therefore more efficient for its investors.
Valuation is key to ensure a JSOP functions as expected. The valuation methodology for JSOPs has been discussed with HMRC from its inception by William Franklin and is considered acceptable and unlikely to be the subject of challenge.
How Pett Franklin can help
We will be pleased to provide tax and legal advice, financial modelling, plan documentation and general consultancy in relation to the establishment of a JSOP. We can also provide follow-up advice on the accounting treatment.