When structuring the share rights of employees and directors in a company or group that employs them, parties to these arrangements will be keen to ensure that any enhanced rights to payments on a share sale are structured in the correct way in order to avoid an income tax on the gain which could potentially mean 52% as opposed to a lower capital gains tax charge of up to 28%.

In the recent case of Grays Timber Products Ltd. v HMRC (Scotland) [2010] UKSC 4, specific arrangements were put in place between Grays Group and Mr Gibson, the managing director of Grays Timber Products Ltd. (“Timber Products”). In accordance with a subscription and shareholders agreement (“Agreement”), if certain conditions were met on a sale of a controlling stake in the parent company of Timber Products (“Parent”), Mr Gibson was contractually entitled to receive a disproportionate share of sale proceeds from the purchaser, greater than that realised by other shareholders. Put simply, Mr Gibson had an enhanced right to proceeds in the event of a sale as provided in the Agreement.