In the 2016 Autumn Statement the Chancellor confirmed that the tax benefits for employee shareholders will cease for arrangements entered into on or after 1 December 2016.
What is an employee shareholder?
Essentially, an employee shareholder is:
- an employee (existing or new) who is employed by a company
- who has agreed that they will become an ‘employee shareholder’, which involves waiving certain statutory rights, in return for being given shares in the company (or parent company) which have a value of no less than £2,000 when given; after
- receiving a written statement of what it means to become an employee shareholder, their rights in connection with their employee shareholder shares and receiving independent advice from either a lawyer or a legal advice centre or trade union official seven days before entering into the employee shareholder agreement.
Advantages of employee shareholder status
- Aligns the interests of the employee with the shareholders.
- For employees who are relaxed about waiving the relevant rights (see below), employee shareholder status is a tax efficient form of direct share ownership. Note the withdrawal of tax benefits effective from 23 November 2016 referred to below.
- Relatively straightforward to set up and administer.
The tax benefits of becoming an employee shareholder
Provided the legislative requirements are met, that independent advice was given prior to 1:30pm on 23 November 2016 and the agreement was entered into on or before 1 December 2016:
- there will be no income tax implications for the first £2,000 of the shares given to the employee shareholder who will be deemed to have paid that sum for tax purposes
- for shares given to the employee shareholder on or before 16 March 2016, any gains made would be entirely exempt from Capital Gains Tax (CGT) on disposal if the unrestricted market value of those shares at the time of acquisition was no more than £50,000
- for shares given to the employee shareholder on or after 17 March 2016 (again, provided that the unrestricted market value of those shares at the time of acquisition was no more than £50,000), the exemption from CGT on disposal is subject to a lifetime limit of £100,000
- Current CGT rates are 20% for higher rate tax payers. Compare this with the equivalent higher income tax rate which is 40%.
If the independent advice was given after 1:30pm on 23 November 2016, or the agreement was not entered into on or before 1 December, the tax benefits described above will not apply.
Statutory implications of becoming an employee shareholder
Employee Shareholders waive certain statutory rights including:
- the right to request time off to study or for training
- the right to request flexible working
- the right to a statutory redundancy payment
- the right not to be unfairly dismissed, subject to a few exceptions.
Other statutory rights, specifically those which relate to notice of the intention to return to work after a period of maternity, adoption or paternity leave, differ in that the notice required from employee shareholders is greater than ‘normal’ employees.
However, there is no reason why most of these rights cannot be recreated via provisions in the employee shareholder’s contract of employment.
What kind of incentive are employee shareholder shares?
This is a direct form of Employee Share Incentive meaning that the employees who become ‘employee shareholders’ will directly own shares given to them.
As a result, employers will want to consider the following:
- whether a new class of shares should be created and used (varying the rights of shares with regards to voting, dividends, thresholds, etc.)
- what should happen if the employee shareholder ceases to be employed; should they be allowed to keep or be required to sell the shares they own
- whether a shareholders' agreement is needed and if the existing articles of association are fit for purpose given the introduction of the employee shareholders.