When EMI is off the table, whether the company is too big, in the wrong trade, or the recipient is an adviser rather than an employee, growth shares are usually the next tool a founder reaches for. They are also one of the most misunderstood, and the misunderstandings tend to be expensive. Here is how they work, how each stage is taxed, why the section 431 election is the pivot, how unapproved options stack up, and what the exit looks like under CGT and BADR. Worked examples use illustrative figures throughout.
What growth shares are
Growth shares are a separate class of shares that only deliver value above a set hurdle: the current market value of the company at the date of grant. Because the shares only participate in value above that hurdle, employees or advisers receive a share of future growth rather than existing equity, and the shares have little or no monetary value on day one. They fall under general employment-related-securities (ERS) rules for tax purposes, not under any statutory tax-advantaged scheme.
Growth shares suit three situations: a company that is outside the EMI qualifying tests, a company that wants to make awards to people who cannot hold EMI options (such as advisers and NEDs), and scenarios where the directors want a share class that participates only in value above a threshold rather than granting equity in the current business.
The hurdle mechanic
The hurdle is the value the company must reach before growth shares participate in any proceeds. It is set at the current market value of the company at the date of grant, supported by a valuation agreed with HMRC Shares and Assets Valuation. Because growth shares carry a right only to value above that hurdle, their standalone market value at grant is low or zero. This low acquisition value is what makes the structure tax-efficient: there is little or no income tax charge at the point the shares are issued.
The hurdle is a structural feature of the share class, not a formula that can be stated as a rule. The precise mechanics depend on the company's articles, the shareholders' agreement, and any ratchet or waterfall provisions. Getting the hurdle right requires professional advice and, usually, a valuation agreed with HMRC in advance.
Worked example: how the hurdle splits exit proceeds
| Event | Illustrative figure | Note |
|---|---|---|
| Company value at grant (hurdle) | £2,000,000 | Agreed with HMRC SAV; growth shares participate above this |
| Exit value (illustrative) | £5,000,000 | Acquisition or secondary sale three years later |
| Total uplift above hurdle | £3,000,000 | £5m minus £2m |
| Growth share pool (illustrative: 10% of uplift) | £300,000 | Growth shareholders split the £3m uplift pro-rata |
| Ordinary shareholders | £4,700,000 | The hurdle value plus their share of the residual uplift |
All figures above are illustrative. The actual split depends on the company's capital structure and the terms of the growth share class. This example is intended only to show the arithmetic of the hurdle mechanism.
How growth shares are taxed
Growth shares and unapproved options are taxed under general employment-related-securities rules. Income tax, and employer and employee National Insurance where relevant, arises on any value acquired above the amount paid at acquisition. Because the growth shares have a low or nil value at grant (the hurdle structure), the income tax charge at acquisition is correspondingly low.
The critical risk is that if the shares carry restrictions (which they almost always do in practice) and no section 431 election is made, HMRC may assess income tax on the value of the shares when restrictions lift, not on the low grant-date value. That later valuation could be much higher. The s.431 election (see below) is the mechanism that prevents this.
Growth shares are not a tax-advantaged scheme in the EMI or CSOP sense. There is no HMRC approval, no HMRC-set limit on the value of shares that can be issued, and no statutory income-tax exemption on exercise. The tax efficiency comes from the hurdle mechanics and the s.431 election, not from a statutory wrapper.
The section 431 election
Where growth shares carry any restrictions (lock-ups, good-leaver/bad-leaver provisions, transfer restrictions), they are "restricted securities" under Part 7 ITEPA 2003. Without an election, HMRC taxes the holder on the full (unrestricted) value of the shares only when restrictions lift, which may be at a higher value and treated as employment income.
A section 431 joint election is made between the employer company and the employee (or recipient) within 14 days of acquisition. It causes the holder to be treated as having acquired the shares at their unrestricted market value on the date of grant. At grant that unrestricted value is low (because of the hurdle), so the income tax charge at acquisition is low. All subsequent growth is then treated as a capital gain rather than employment income when the shares are eventually sold.
Missing the 14-day window is one of the most common and most expensive mistakes in growth-share structuring. Once the window closes, the election cannot be made late.
The detailed mechanics of a s.431 election, including the form of the election and the restricted-securities charging provisions it disapplies, are covered in the section 431 elections guide. This guide keeps the explanation at pointer level.
Unapproved options: the alternative
Unapproved options (also called non-tax-advantaged options or general option awards) also fall under general ERS rules. The key structural difference from growth shares is timing: the holder acquires an option to buy shares at a fixed price in the future, rather than acquiring shares now.
Income tax (and NIC) on unapproved options arises at the point of exercise, on the spread between the exercise price and the market value of the shares at that date. With growth shares and a s.431 election, the income tax event is at acquisition (when the value is low); with unapproved options, the income tax event is at exercise (when the value may be much higher if the company has grown). Both routes then produce a capital gain on disposal measured from the value at which income tax was last charged.
Comparison: growth shares, unapproved options, EMI
| Feature | Growth shares | Unapproved options | EMI options |
|---|---|---|---|
| Who can hold | Employees, advisers, NEDs, non-employees | Employees, advisers, NEDs, non-employees | Qualifying employees only (working-time test) |
| Tax rules | General ERS rules | General ERS rules | Statutory tax-advantaged scheme |
| Income tax event | At acquisition (low value if s.431 made) | At exercise (on spread) | None at grant or exercise if conditions met |
| NIC exposure | On value above amount paid at acquisition | On spread at exercise (employer and employee) | None at exercise if conditions met |
| s.431 election needed | Yes, within 14 days of acquisition | At exercise if shares acquired are restricted | Not typically applicable at EMI grant stage |
| CGT on disposal | 18% / 24%; BADR may apply | 18% / 24%; BADR may apply | 18% / 24%; BADR easier to meet |
| Company limits | None set by statute | None set by statute | Gross assets max £30m; fewer than 250 FTE |
| Tax-advantaged? | No | No | Yes |
Sources: ERSM30450 for the general ERS rules; gov.uk EMI guidance for the EMI column. Use the EMI vs unapproved calculator to model the tax difference for a specific scenario.
When growth shares are used instead of EMI
EMI is the preferred route for most early-stage UK technology companies because of its statutory income-tax and NIC exemptions at exercise and the more generous BADR treatment on exit. But EMI qualifying conditions rule it out in several situations:
- Company size: the company must have gross assets of no more than £30m and fewer than 250 full-time-equivalent employees. A scale-up that has crossed either threshold cannot grant new EMI options.
- Excluded activities: companies carrying on an excluded activity (such as property development, financial activities, or legal or accountancy services) cannot use EMI, regardless of size.
- Non-employees: EMI options can only be granted to qualifying employees who meet the working-time test. Advisers, NEDs, consultants and founders who are no longer employees cannot hold EMI options. Growth shares (or unapproved options) are the only share-scheme route for these individuals.
Where EMI is available, it is almost always better. Where it is not, growth shares are the most common structured alternative. A company that has just tipped over the EMI size thresholds might use CSOP, capped at £60,000 of options per employee, as a partial bridge before falling back to growth shares. See the EMI qualifying company rules guide and the EMI vs CSOP guide for the full qualifying conditions.
The exit: CGT and BADR
When growth shares are eventually sold, any gain above the base cost (the unrestricted market value at acquisition, on which income tax was charged at the time of the s.431 election) is a capital gain. CGT on share disposals is charged at 18% within a taxpayer's remaining basic-rate band and 24% above it. These are the current main rates in force since 30 October 2024.
BADR interaction. Business Asset Disposal Relief can reduce the rate to 18% on up to £1m of qualifying lifetime gains (the current rate from 6 April 2026; it was 14% for 2025/26 and 10% before that). For ordinary growth shares to qualify for BADR, the standard personal-company test and two-year holding test must be met. The personal-company test typically requires the shareholder to hold at least 5% of the ordinary share capital and voting rights in the company.
Important: the EMI-specific BADR concession does NOT extend to ordinary growth shares. EMI option holders can reach BADR on the two-year holding rule alone, but that relaxation of the 5% personal-company test is an EMI feature and stops there. Growth-share holders are back to the full BADR conditions, the 5% test included, to access the 18% rate. Because growth shares are usually a small slice of a separate share class, clearing 5% is often harder than it looks. Whether a given award qualifies then comes down to the terms of the share class and the holder's wider position, so pin it down at the point of exit rather than assuming.
What to do next
Growth shares require three things to work correctly: a defensible valuation agreed with HMRC Shares and Assets Valuation before or at grant, well-drafted articles and a shareholders' agreement that define the hurdle and the waterfall clearly, and a section 431 election signed by both the company and the recipient within 14 days of the shares being issued.
Every growth-share award is also an employment-related-securities event. An ERS return (or nil return) must be filed by 6 July following the end of the tax year in which the award was made, even if the award was low-value or nil-valued. Missing the ERS reporting deadline attracts automatic penalties.
Whether you are drafting a growth-share plan, weighing it against unapproved options, or just checking your company still clears the EMI tests, the share schemes service runs the whole cycle: valuation, structuring, the s.431 election and the annual ERS return. If you would rather read first, the option pool basics guide sets the wider context, and the funded-startups hub maps where growth shares sit for companies that have raised.