Employee Share Schemes Update

 

 

Employee share arrangements remain an important way to recruit and retain key individuals within a business and to incentivise all employees to work collaboratively to aid the company to achieve its business objectives.

 

Employee ownership may be seen to increase further in the future as it is promised that the Finance Bill 2014 will introduce a CGT exemption on qualifying disposals of a controlling interest in a business into an employee-owned structure from April 2014. Little detail has been published on how this will operate and what disposals will qualify for the relief but this will be worth keeping under review for existing shareholders thinking of passing some of their existing shares to employees.

 

EMI options

EMI share options remain the most popular of all the schemes for companies which qualify under the rules and they continue to provide potentially the most tax efficient way of rewarding employees. Their status has been further enhanced following the announcement that EMI options will qualify for entrepreneurs’ relief.

 

The change was initially announced in the 2012 Budget but has now been confirmed. The broad effect of this is that for options granted after 5 April 2012, the entrepreneurs’ relief rate of capital gains tax of 10% will be available provided at least 12 months elapses between the day of the grant of the option and the date of sale of the shares. The size of the shareholding will no longer be relevant in such situations and any ordinary shares acquired under an EMI option will obtain the benefit of this relief if the other conditions are met. This is a significant advantage for the employee rather than awarding them say 2% of the shares directly which would not qualify for entrepreneurs relief.

 

Employee shareholder status

A new employee shareholder status was announced on 8 October 2012. Employee shareholders will have different employee rights and will receive shares worth between £2,000 and £50,000 in the company for which they work. At present, there appear to be very few rules regarding which rights must be given up, or for how long. The associated employment law reform is not expected until autumn 2013.

 

Employee shareholders will benefit from two tax reliefs with effect from 1 September 2013, when the new status comes into force:

• Gains on up to £50,000 of shares acquired by employee shareholders will be exempt from CGT.
• The first £2,000 of share value that employees receive under the new status will be free from income tax and NIC when they acquire the shares. This will be achieved by deeming an employee shareholder to have paid £2,000 for their shares and will ensure that there is no tax or NIC liability for an employee shareholder who receives the minimum allocation.

The employee will need to weigh up the lost rights against the value of the shares they are given. However, the potential tax and NIC charges on shares in excess of £2,000 in value may make larger offerings unattractive as any shares over and above that value will be subject to the normal PAYE and NIC charges.

 

The Chancellor has strongly backed the introduction of this new scheme but it remains to be seen whether employees consider the loss of some or their employment rights as being a suitable price to pay to receive £2,000 of free shares or a larger shareholding whilst accepting an immediate PAYE and NIC cost in anticipation of a future tax free capital gain.

 

If you have any questions on this topic please contact Linda Warner.