The Government has dangled the carrot of tax benefits in front of employees in order to get them to accept shares in their employer in return for giving up certain employment rights.
The tax benefits
Employees who become ‘employee shareholders’ under the new regime can receive shares worth up to £2,000 free of income tax.
In addition, shares worth up to £50,000 when the employee acquired them will be exempt from capital gains tax on any subsequent sale.
There’s no such thing as a free lunch (certainly where HMRC is concerned), so in return for these tax benefits an employee shareholder will have to give up various employment rights, most significantly the right to claim unfair dismissal. However, since employees now have to work for 2 years before they acquire that right, new employees won’t be at a significant disadvantage until the end of that period – a risk they may consider worth taking in return for ‘tax free’ shares in their employer, particularly where the business plan involves a sale in the near future.
Needless to say there are certain legal and procedural requirements which have to be complied with in order for individuals to become ‘employee shareholders’:
- The company and the employee must enter into an ‘employee shareholder agreement’ under which the employee receives fully paid shares in return for sacrificing certain employment rights.
- The employee must receive independent legal advice on the employee shareholder agreement and the company must pay for that advice.
A further requirement is that, other than entering into the employee shareholder agreement, the employee cannot give any money or other consideration to the company in return for their shares. Since a company cannot issue shares for less than their nominal value, the Government has indicated that this will mean that, in the majority of cases, the employee shares will have to be paid up by capitalising the shares from available reserves. As a result, employee shareholder status may not be a viable option for companies without such available reserves, particularly new start ups – precisely the target audience this regime was originally aimed at.
Employee shareholder shares are another option which should be considered alongside entrepreneurs’ relief and EMI options when structuring remuneration packages. Companies which do not qualify for either of those regimes may be able to use employee shareholder shares to incentivise their staff. Even where companies and employees do qualify for entrepreneurs’ relief or the EMI regime, employee shareholder shares could be used to supplement their existing packages.