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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

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HM Revenue & Customs
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Schedule 3 SAYE option schemes: Shares to which schemes can apply: Deferred shares

Deferred shares may be ordinary share capital. An example might be a company with two classes of share, ordinary shares and deferred shares. The two classes may have identical rights except for a period of ten years the deferred shares bear no dividends. After the ten year point the two classes merge and have the same rights to dividends as the original ordinary shares. The fact that the deferred shares have no rights to dividends during a particular period does not mean they are not ordinary share capital. Deferred shares are often created for commercial reasons, to enable private investors to take capital growth instead of dividend income.

New schemes proposing to grant options over deferred shares should consider carefully whether this will cause a breach of section 519(1)(c) ITEPA.

Deferred shares give scope for abusing the tax advantaged share scheme legislation but their use as scheme shares in tax advantaged share schemes is not common. The scope for abuse stems from the fact that at the outset (when the options might be granted and the option prices fixed) the value of deferred shares will be much less than the value of comparable ordinary shares which have dividend rights and with which they will, in due course, merge.  Because of their inherent rights to receive dividends after the merger of the two classes of shares, the value of the deferred shares is therefore capable of increasing irrespective of any improvement in the company’s performance.