72797_MakingEquityWork__EmployeeShareholderStatus

Overview Employee Shareholder Status enables employees (or prospective employees) to trade some statutory employment rights for certain tax exemptions in respect of shares in their employer or a company within the same group as their employer. The key benefit of Employee Shareholder Status is that any gain in value of the shares acquired by employee shareholders will not be subject to capital gains tax (CGT) up to the first £100,000 of gain. CGT is currently charged at up to 20%. How does it work? Broadly individuals that agree to become Employee Shareholders must be issued with shares with a minimum value of £2,000. If shares are issued with a value over £50,000 then those issued in excess of £50,000 will not qualify for the CGT exemption. The first £2,000 of shares can be gifted to employees free of income tax or national insurance. However, employees suffer income tax and potentially National Insurance Contributions (NIC) on any remaining value.

In order to become an Employee Shareholder, employees must agree to forgo the applicable statutory employment rights; protection from unfair dismissal, statutory redundancy pay, the right to request flexible working arrangements and the right to request time off for training (but it is worth noting that it may be possible to replicate similar rights via contract). The employer or a company within the same group will then issue new shares to the employee. Implementing ES status could provide significant tax advantages over existing incentive structures (such as the entrepreneurs’ relief 10% CGT rate and employees simply subscribing for shares at market value and paying 20% capital gains on any growth) as any gain in value of the shares acquired by employee shareholders will not be subject to CGT.

Making Equity Work Employee Shareholder Status

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