Posted by James Pearson on 29 Apr 2013

Employee Share Schemes

The government’s Employee Shareholder Status has just been passed by the House of Lords after a series of concessions were made. Employee Share Schemes are designed to allow employees to acquire capital gains tax exempt shares in their employer company in exchange for surrendering certain employment rights.

The concessions are based around ensuring that employees are fully aware of the impact of surrendering employment rights and preventing anyone being forced into accepting Employee Shareholder Status.

There are still details to be clarified, including the income tax consequences of the employee being given the shares in the first place and how the employment rights being surrendered will be valued, but this scheme looks like an attractive solution for employers seeking to offer employees shares in their company without the complexity or costs of a share option scheme.

Capital Gains Tax Exemption

The capital gains tax exemption on the first £50,000 of shares will allow an employee tax-free participation in the growth of their employer company and also to benefit from the income tax and national insurance rates available through dividend payments.

Employee Shareholder Status

The Employee Shareholder Status is the most obvious display of a renewed interest from policy makers in encouraging employees to hold a stake in their employer company. Other smaller steps are also being taken. For example, HMRC have recently made a change to the rules governing Share Incentive Plans (SIP), giving companies more flexibility to allow employees to reinvest dividends received through the SIP into additional shares. SIP’s are broad share schemes designed to be applied across a wide range of staff to offer small-scale incentives across a large company.

Enterprise Management Incentive (EMI) Scheme

By contrast, the Enterprise Management Incentive (EMI) Scheme is designed to offer substantial benefits to key employees. Under an EMI, certain employees are given an option to acquire shares at a future date, but are only taxed on the difference between the price they pay for those shares and the current market value. This means that the increase in value of the shares while under option is free from income tax.

On a future sale, the employee is subject to capital gains tax on the sale proceeds less the amount paid for the shares and any amount on which they were taxed. HMRC have been tweaking this scheme to allow capital gains tax relief, reducing the rate of tax to 10% on a future sale, to be available regardless of the number of shares held by the employee, removing a previous 5% minimum holding rule.

The options available to an employer looking to incentivise staff are varied and frequently changing, but the rewards on offer mean that these choices are often worth investigating.

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