Employee Shareholder Status Print

On 23 November 2016 the government announced that the income tax relief and CGT exemption in respect of Employee Shareholder Status was being withdrawn in respect of shares issued to an employee under an employee shareholder agreement made on or after 1 December 2016.

The CGT exemption for shares issued to an employee before 1 December 2016 are not affected by the withdrawal of this relief. However, for shares acquired under these arrangements between 17 March 2016 and 30 November 2016, a cap of £100,000 has been put on the amount of gains that will be exempt on a future disposal.

This relief enabled an eligible employee to receive shares from his employer in return for giving up certain rights as an employee.
The employee received fully paid up shares with a minimum value of £2,000. The employee could not pay for the shares in any way, and in return had to give up the following statutory rights:

Unfair dismissal;

Redundancy payments;

Time off for training;

The right to request flexible working hours;

Stricter rights in respect of statutory maternity, paternity and adoption leave will apply.

The shares received up to the value of £2,000 were free of tax and NIC. Any shares received in excess of that value were subject to income tax, and NIC in the normal way.

Any capital gains on selling shares acquired by the employee before 17 March 2016 will be exempt from CGT provided that the value of shares received at acquisition is not more than £50,000. Where the value on acquisition exceeded £50,000 then the employee will be liable to CGT on the proportion of the proceeds equal to the excess acquisition value. A lifetime limit of £100,000 was introduced in respect of gains on Employee Shareholder shares acquired after 16 March 2016.

Example:

In May 2014 Jim received employee shares with a value of £65,000 on giving up his statutory rights. He sells the shares in 2018/19 for £350,000. Assuming Jim is not entitled to Entrepreneurs’ Relief, and that he has no other gains in the year in excess of the annual allowance, his liability is as follows:

£
Disposal proceeds 350,000
Less Cost of shares 65,000
Overall Gain 285,000
Less Exempt proportion: £285,000 x 50,000/65,000 219,230
Taxable Gain 65,770
CGT thereon @ 20% 13,154

If, instead, the employee shares had been received by Jim in June 2016, then on the above disposal the exemption would be restricted to £100,000 and his taxable gain would be £185,000.

The employee, or a person connected to him must not have a material interest in the company. This means that he may not hold more than 25% of the voting rights in the company.

The rules regarding the buy-back of shares by a company are relaxed so that the company may repurchase the shares from the employee at a future date, and that the consideration received by the employee will not be treated as a distribution (dividend) but will retain the status of exempt from CGT.

 

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