Taking stock of employee shareholding

In response to the government introducing a new status of employment alongside worker and employee, Derek Gemmell has been reviewing the opportunities ‘Employee Shareholder Status’ brings.

This initiative provides individuals who agree to enter into a new form of equity-linked employment contract, a shareholding in their employer in return for giving up certain employment rights. On receipt of an offer of such status, the offering employer will be obliged to pay for the employee to receive relevant legal advice.

The positives being touted for this plan surround the reduced red tape associated with employment of an employee shareholder and the company’s ability to engage employees by providing each with up to £50,000 of shares with any gains made on the disposal of such shares being exempt from capital gains tax (CGT). Where shares worth in excess of £2,000 are provided, an Income Tax liability for the employee is likely.

The negatives surround the obligation for the employee to give up employment rights to accept the offer. Such rights include unfair dismissal, redundancy, flexible working, time off for training and the requirement for eight weeks notice on return from maternity leave increasing to 16 weeks.

Therefore, it is essential an employee considers whether the tax incentives of such a status change out weigh the employment rights forgone.

Can this status bring opportunities?

This initiative will not be of significant value to the masses but in specific circumstances it will be of great worth.

For example, where a relatively new private company, with significant growth potential, wishes to incentivise a director in its shareholder group for efforts in driving the company’s growth, an issue of fresh equity within this initiative will be available.

By assuming employee shareholder status (although there will be an Income Tax liability on receipt of such shares), the recipient can access exemption from CGT on gains from a future disposal of the shares they acquire.

Therefore, it is likely that in the right circumstances, the Income Tax to be borne would be an acceptable costs to allow the exemption from CGT on significant gains to be accessed given potential growth prospects.

Additionally, where an individual has already exceeded the £10m lifetime allowance of gains for Entrepreneurs’ Relief, being offered Employee Shareholder Status provides potential for reducing the 28% rate of CGT on future gains to nil; a compelling reason for giving up employment rights.

Therefore, while such plans are not relevant for all employees, we see an opportunity for this initiative where the loss of employment rights may not be of principle concern to senior employees looking for incentivisation.

For more information contact Derek Gemmell, Director, or contact us here.