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Employee shareholder status

11 October 2013

From 1 September 2013 employees can acquire shares in their employer company with some significant tax advantages, in return for giving up some of their employment rights. This can be taken up by any number of employees, and can apply to any grade of employee, and so may be of interest to senior management, even if the initial political direction seems to have been aimed more at the shop floor.

Please note that these arrangements will involve an actual issue of shares to the employees (employee shares), and it is not a share option scheme. The existing HMRC approved share schemes, such as the Enterprise Management Incentive Scheme (EMI), Company Share Option Plan (CSOP), Share Incentive Plan (SIP) and Save As You Earn (SAYE) remain in place, and these new Employer Shareholder Status provisions are not a replacement for any of them. But they may well be worth considering alongside or as an alternative to existing approved share schemes.

Tax advantages

  • on acquiring the employee shares, the first £2,000 worth will be free of any income tax and national insurance (NI). But please note that if the employee takes more than £2,000 worth, the excess of those employee shares will be subject to income tax (and possibly NI) in the usual way as when employment related securities are received by an employee at an undervalue or without paying for them at all
  • on disposal of the employee shares, there will be no CGT liability on any gain on those shares, provided that the market value of the employee shares acquired by the employee was less than £50,000 at the time they were acquired
  • the employer company may be able to obtain corporation tax relief in respect of the market value of the employee shares awarded to the employee, and the cost of providing the employee with legal advice.

Headline conditions

  • the employee must take up at least £2,000 worth of employee shares in their employer company (or the parent company in the group)
  • the capital gains tax (CGT) advantages will only apply on up to £50,000 worth of employee shares awarded under these arrangements in the employer company (or the parent company in the group)
  • for the purposes of calculating the value of the employee shares, the valuations are taken as at the date when the employee shares are acquired. The company can agree the valuation for these purposes with HMRC in advance of awarding the employee shares
  • the only consideration to be provided by the employee is the forfeiture of certain employment rights, including (among others) the right to claim for unfair dismissal, and redundancy rights. The employee must not provide any other consideration for the employee shares
  • the employer must offer and pay for independent legal advice (not including tax advice) to be provided to the employee, in relation to taking up the employee shares and forfeiting their employment rights, regardless of whether the employee takes up the shares or not
  • the employee (and any persons connected with him or her) must not have a material interest in the employer company (or the parent company in the group) at any time in the period of one year up to the date when the employee shares are acquired. In this context a material interest broadly speaking is having at least 25 of the voting rights in the company, and where the relevant company is a close company, having an entitlement to at least 25 of the assets that would be available for distribution among the participators in the close company.

Other points to note

These new Employee Shareholder Status provisions may be worth considering along with other more well worn routes, in terms of rewarding or incentivising employees and management. On the debit side, the employee does of course have to be willing to give up certain employment rights in return for the award of the employee shares, and there will be an upfront income tax charge (and possibly NI, if the shares are "readily convertible assets") if and to the extent that more than £2,000 worth of shares are awarded to the employee. But on the credit side, a later CGT free disposal of those shares (on up to £50,000 worth, when acquired) could be a significant inducement to take up these arrangements.

Since the £50,000 limit is based on the market value of the shares as at the date that they are awarded, as opposed to the market value of the shares when they are disposed of, any growth in value of those shares (subject to that £50,000 initial market value cap) between the date of award and date of their disposal can be CGT free, provided that all the relevant conditions are satisfied under the Employee Shareholder Status arrangements. This may be an attractive alternative to some other reward and incentive arrangements, especially if for example all the statutory conditions for some of the HMRC approved share schemes cannot be satisfied.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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