Restricted Share Schemes

May 2019

Restricted Share schemes have become a popular way of incentivising and retaining key employees. Such schemes are commonly viewed as a more enticing option for employees instead of traditional cash bonuses or stock options. Restricted Shares give employees an immediate stake in the employer company, although limited by some restrictions for a defined time period.

What are Restricted Shares?

Restricted Shares are shares that are acquired by an employee or a director of a company in the company in which they are employed. They are restricted in that they must be retained for a fixed period of time, at least 1 year, before any disposal. This fixed period is referred to as the “clog period”.

Restricted Share Scheme

A Restricted Share Scheme is established by setting up a trust where the employer holds the restricted shares for the clog period. In order for shares to be restricted shares, the following conditions must be satisfied:

  • There must be a written agreement where it is stated that there is a restriction on the freedom of the participant to transfer, charge or otherwise dispose of the shares for a fixed period of time, being at least 1 year; and
  • The shares cannot be assigned, transferred, charged or otherwise disposed of, except in limited circumstances.

The limited circumstances referred to above are the death of the holder of the shares or where there is a change in control or a reorganisation of the share capital of the company in which the shares are held. In circumstances where the entire issued share capital of a company is being bought the shares could be sold by the participants of the scheme under drag-along or tag-along provisions.

The restricted shares cannot be transferred or disposed of during the clog period. Even though a participant in the scheme is the beneficial owner of the shares, he is effectively prohibited from dealing with the shares. The person who takes up the restricted shares must agree not to seek to break the clog period.

Abatement of Income Tax

The Tax Consolidation Act 1997 provides for an abatement of the income tax charge on the acquisition of the shares. The amount chargeable will be the excess of the market value of the shares on the date of their acquisition over the consideration paid, if any, for the shares. Due to this, the acquisition of Restricted Shares may be more enticing than a cash bonus for employees. The percentage reduction depends on the number of years for which the restriction on the disposal of the shares remains in place.

Period of Restriction Percentage Reduction
1 year 10%
2 years 20%
3 years 30%
4 years 40%
5 years 50%
Longer than 5 years 60%


The End of the Clog Period

When the clog period expires, the participant may do whatever he likes with the shares. If the holder of the Restricted Shares looks to sell his shares at the end of the clog period, a Capital Gains Tax charge may arise. In calculating the taxable gain, tax is due on the difference between the sale price of the shares and the acquisition cost of the shares.

For more information, please get in touch with your usual Whitney Moore contact,  Robert Carroll or any member of our Corporate team.