UK: Employee Shareholder Status – A New Opportunity For Tax-Free Growth For Employee Shares

Last Updated: 14 October 2013
Article by Graham Muir and Laura Allum

Summary and implications

Since 1 September 2013, employers may offer employees a new form of employment relationship, that of "employee shareholder". The new employment relationship was implemented by the Growth and Infrastructure Act 2013 which amends the Employment Rights Act 1996.

In essence, an individual who becomes an "employee shareholder" will exchange some of their UK employment rights for shares (employee shareholder shares) in the business they work for.

Limited relief from income tax and National Insurance contributions (NICs) will be available on acquisition of the employee shareholder shares and an exemption from capital gains tax (CGT) will be available on disposal of those shares. The tax reliefs were introduced in the Finance Act 2013.

Employers looking for new, tax-efficient ways to incentivise existing or new employees (including possibly senior management teams) may wish to consider whether the new employee shareholder relationship could benefit their business.

Who can be an employee shareholder?

Both new employees and existing employees of a company may be offered the opportunity to become an employee shareholder. However, an existing employee cannot be required to accept a change in their existing employment status from employee to employee shareholder. Protections have been built into the legislation to ensure that any existing employee who chooses not to accept employee shareholder status is not disadvantaged as a result.

How does an individual become an employee shareholder?

In order for an individual to become an employee shareholder a number of conditions have to be satisfied, including:

  • the company and the individual must agree that the individual is to be an employee shareholder;
  • the company (or its parent) must issue fully paid up shares to the individual which have a value of no less than £2,000; and
  • the company must give the individual a written statement setting out the particulars of the employee shareholder status and the rights attaching to the employee shareholder shares (for example, whether the shares carry voting rights or rights to dividends).

An agreement between the company and an individual that the employee is to be an employee shareholder is of no effect unless, at least seven days before the agreement is made, the individual has received the written statement referred to above and has received advice from an independent legal adviser as to the terms and effect of the proposed agreement.

It is a requirement of the legislation that any reasonable costs incurred by the individual in obtaining the advice must be met by the company. The payment or reimbursement of those costs by the company will not constitute taxable earnings for the employee. Further, HMRC have recently confirmed that the funding of those costs by the employer will not usually be a considered as a taxable benefit for the individual.

What employment rights does an employee shareholder give up?

Unlike employees, individuals who become employee shareholders will forgo certain rights under the Employment Rights Act 1996. These rights are:

  • the right not to be unfairly dismissed;
  • the right to a statutory redundancy payment;
  • the right to request flexible working in certain circumstances; and
  • the right to request time off to study, or for training.

In addition, employee shareholders must provide 16 weeks' notice of their intention to return to work following maternity leave, adoption leave and additional paternity leave (the period for employees is shorter).

How will the income tax relief operate?

There are in fact two income tax reliefs available in relation to employee shareholder shares.

The first relief applies on acquisition of the employee shareholder shares. In summary, for income tax and NICs purposes, the employee shareholder will be treated as having made a payment of £2,000 for their employee shareholder shares. Accordingly, only the market value of the employee shareholder shares which exceeds £2,000 will be subject to income tax and NICs on acquisition of the shares. The relief is not available if the employee shareholder held a material interest (broadly a 25 per cent interest) in the company (or a parent undertaking) at the date of acquisition of the employee shareholder shares (or held such an interest in the previous year).

The second relief provides an exemption from income tax on the amount paid by a company to an employee shareholder in circumstances where shares are bought back from an employee shareholder by that company. In order for the exemption to be available, at the time of the buy-back:

  • the employee shareholder shares must qualify for CGT relief under the provisions referred to below; and "the employee shareholder must no longer be an employee of, or an officer in, the company or an associated company.

How will the CGT relief operate?

Broadly, an employee shareholder share will be exempt from CGT on its first disposal. However, this exemption only applies to employee shareholder shares with a maximum value on acquisition of £50,000 for each employee shareholder. The exemption is not available if the employee shareholder holds a material interest (broadly a 25 per cent interest) in the company (or a parent undertaking) on the date of acquisition of the employee shareholder shares (or held such an interest in the previous year).

Will HMRC agree the market value of employee shareholder shares?

The market value of the employee shareholder shares on their acquisition date is a crucial factor in determining:

  • whether the conditions for employee shareholder status have been satisfied; and
  • whether (or to what extent) the income tax and CGT reliefs referred to above are available on acquisition and/or disposal of the employee shareholder shares.

HMRC has recently confirmed in its Employment-Related Shares and Securities Bulletin that companies wishing to award employee shareholder shares may propose a share valuation to HMRC's Shares and Assets Valuation team in advance of the issue of those shares. Where possible, HMRC will agree the valuation for tax purposes and any such agreement will be effective in relation to employee shareholder shares issued within the following 60 days.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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