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Employee shareholder shares - declining take up after the Budget announcement

1 June 2016

Since their introduction in 2013, we had consistently seen a marked increase in the popularity of employee shareholder shares as a type of share incentive arrangement - especially in private equity deals, where other tax favourable schemes such as EMI and EIS are often unavailable.

Employee shareholder shares (ESS) were originally introduced with the aim of increasing employee shareholder ownership, aligning the interests of employees and investors whilst at the same time reducing employment termination costs for new or existing employees – this was achieved by giving employees free shares in their employer/parent company in return for giving up certain statutory employment rights (primarily in relation to redundancy and unfair dismissal).

Under the ESS requirements an employee must receive a minimum of £2,000 of free shares – these are tax-free on receipt. An employee can receive a maximum of £50,000 of free shares, provided that income tax and any National Insurance contributions are paid on the balance.

Up until a surprise announcement in the March 2016 Budget, ESS were exempt from capital gains tax on sale, so any gains were completely tax free. The recent Budget announced that the tax-free gain on ESS acquired under agreements made after 16 March 2016 will be subject to a lifetime limit of £100,000 per participant.

This announcement lead to an initial flurry of activity on Budget day to finalise ESS agreements that were close to completion – but since then we have seen private equity owned companies and private equity houses starting to reconsider the attractiveness of ESS arrangements given the announced changes to tax treatment.

Due to the new cap and the fall in the highest rate of capital gains tax also announced in the Budget, the maximum potential saving on the sale of new ESS will be £20,000 – the loss of employment rights may look less appealing to employees in light of this reduced benefit. Some commentators also feel that this new cap on the limit may signal further changes to ESS – it could be the start of further reductions. There is also the balance that companies look to strike when weighing up the implementation and other costs of ESS as against the possible benefits for all parties involved – and it appears the balance may now be shifting away from ESS as the favourite option.

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