Employee Shareholder Status – Practical Benefits
The concept of Employee Shareholder (ES) Shares was introduced in September 2013.
In exchange for an employee signing away some of their employment rights, they receive shares in their employing company (or its parent) worth at least £2,000. They are deemed to pay £2,000 for the shares and any value in the shares above £2,000 is taxable on them as a benefit in the year of receiving the shares.
Given the relatively small income tax exemption of £2,000, ES is easy to overlook, but what advantages can ES shares actually bring?:-
– HMRC are willing to agree a value for the shares prior to them being issued to an employee.
No pre-transaction valuation agreement process is available under normal circumstances for shares acquired by employees. Therefore normally an employee acquiring shares cannot be certain of their income tax liability when they acquire shares through employment
– If an employee has less than 5% of the share capital then they would not normally qualify for Entrepreneurs’ Relief. ES shares offer a total capital gains exemption no matter how low the equity percentage.
No matter what percentage of shares the employee holds (as long as they don’t hold 25% or more), the first £50,000 worth of ES shares that they acquire will be benefit from a capital gains exemption (no matter the size of the capital gain that they eventually make).
Any balance of shares will be subject to tax at 28% or 10% depending on their overall holding.
– The employing company receives a corporation tax deduction for the whole value of the shares provided to the employee, including the £2,000 deemed payment.
This should help to provide funding to the company to help pay for the legal advice that the employees must receive as part of the arrangement.
– A buy back of ES shares by the Company will normally automatically facilitate the Capital Gains Exempt status for the employee on their proceeds
A buy back of shares from an employee is normally subject to income tax as per a dividend, unless a number of conditions apply and then a 10% tax rate is the best that can be expected. ES shares that are subject to the capital gains exemption will not normally be taxed as income and so gains should be free from tax.