Tax efficient way for employees to become a shareholder

Employee Shareholder Status (ESS) is a recently introduced tax efficient share incentive plan designed to encourage employee share ownership and ultimately company growth.  Under the scheme a company may issue new shares to employees in exchange for the employee giving up certain employment rights, the employees will then benefit from tax relief at the time of acquisition and disposal.

Benefits 

The benefit for the employer is that employees are incentivised to grow the business, leading to increased staff retention and motivation.

The benefit for the employee is that they receive shares without having to pay for them and obtain tax relief both on acquisition and disposal of the shares.

Example of Employee Shareholder Status

An employee acquires employee shareholder shares with a total market value at the award date of £50,000 in exchange for entering into an agreement to become an employee shareholder.

The first £2,000 is treated as ‘deemed consideration’, with employment taxes being charged on the balance of £48,000.   If the employee is a higher rate taxpayer, the income tax and national insurance (NICs) payable would amount to £ £20,160.

The company receives corporation tax relief (assuming a 20% corporation tax rate) of £10,000.  If employers’ NICs are payable, the (tax deductible) employers NICs will amount to £6,624.

The employee sells the shares at a later date for £250,000.

The employee is exempt from tax on the first £100,000 of gain realised on the disposal. The remaining £150,000 is taxed at no more than 20%.

The employee thus realises a total value of £250,000 having suffered only £50,160 in tax.  His profit from the arrangement net of tax is hence £199,840 giving an effective tax rate in this example of c.20%.

Key features at a glance

• Greater employee incentivisation and reward is achieved through employee share ownership
• The employer has to provide shares worth at least £2,000 to the employee.
• The only ‘cost’ to the employee for the shares will be the employee’s agreement to become an ‘employee shareholder’, which will give the employee reduced statutory rights compared with other employees; namely:

- no right to unfair dismissal (except where the law otherwise requires it, or for reasons that relate to discrimination, or in certain health and safety cases)

- no right to statutory redundancy pay

- reduced rights to request flexible working and time to train; and

- the employee must give 16 weeks’ notice instead of 8 weeks to return early from maternity or adoption leave.

• The offer may be made to selected employees only; i.e. there is no need to make the offer to employees generally.
• The company must provide a written statement to the employee setting out the rights to be given up, along with detailed information on the shares that will be given in exchange. The shares may be of a special class with such rights and restrictions as the employer may require.

• The employee must be given access to independent legal advice, and ‘reasonable costs’ of this must be met by the employer (these costs will not be treated as a taxable benefit).

• The employee must be given a seven day ‘cooling-off’ period.

• The company must self-certify an employee shareholder share plan with HMRC.

• Employee gains made on the disposal of the shares are exempt from capital gains tax (CGT) up to a maximum of £100,000 but if the shares are transferred to a spouse or are exchanged for new shares as part of a reorganisation of share capital, then any further growth in value thereafter is not exempt when realised.

• Employee shareholder shares can be issued to any employees or directors, but there are restrictions for shareholders who, together with ‘connected’ persons, already own 25% or more of the company.

• Each employee shareholder may acquire up to £50,000 worth of shares under this plan, by reference to their ‘unrestricted' market value as at the date of acquisition (that is, the value that the shares would have had ignoring the effect of any restrictions). There are special rules where shares are not acquired in one tranche.

• Fundamentally, each employee offered participation must form a judgement (with the help of a legal adviser) as to the value of the rights they are giving up and weigh that value against the value of the shares received in return, including the potential tax free gain to be made on their disposal.

How Shorts can help with Employee Shareholder Status

Please contact us if you would like to discuss implementing Employee Shareholder Status.