CLOG SCHEMES Restricted shares are free shares given by a company to selected employees which must be retained by recipients for a set period before they can be disposed. The time during which the shares must be retained – at least one year – is referred to as the “clog” period. The shares are offered as a bonus and the scheme offers a more tax-efficient alternative – for both employer and employee – to a cash payment.
HOW DOES IT WORK? Under a Restricted Share Scheme (RSS), the first step is for the company to set up a trust to hold the shares during the restriction/clog period. Then, the company will formally approach the employees they want to take part in the scheme, and offer specific details on the number of shares being offered and length of the proposed clog. If the terms on offer are agreeable to the employee, they will formally accept in writing or if a company uses a platform like Global Shares, the employee just has to accept the offer via their online account. The key consideration then is that the shares will be held in the trust for the agreed period, and during that time participants will not be able to transfer or sell them. The only exceptions to this rule will arise in the case of the death of a participant or possibly in a takeover scenario. In the event of a participant leaving the company during the clog period, how they are treated will depend on whether the circumstances of their departure lead to them being regarded as a “good leaver” or a “bad leaver”. Individual businesses will develop their own internal approach on this point.
This constitutes recognition on the part of Revenue that even though the participants hold the shares, the restrictions in place on transfer and sale effectively reduce their value for those individuals. The extent of the tax reduction will be directly linked to the number of years participants must hold the shares before being able to sell them. Basically, there is a 10% abatement for every year of restriction, up to a maximum of 60%. So, if your plan includes a one-year restriction, you will receive a 10% tax bill reduction; for a five-year restriction, the figure will be 50%; but for plans with even longer clog periods the maximum tax reduction is 60%, whether the clog for six, seven, eight years or even longer. When shares are finally disposed, that transaction may be subject to CGT, depending upon the specifics of the plan.
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