The Chancellor of the Exchequer, in his Budget statement, announced further details in relation to “employee shareholders” (See Resources below for our article, “Shares in Exchange for Employment Rights”).
Background
In October 2012, the Chancellor of the Exchequer announced plans for a new kind of employment contract where employees can exchange some of their UK employment rights for between £2,000 and £50,000 of shares in the business they work for, with any gains on the subsequent sale of those shares being exempt from capital gains tax.
The Chancellor has now made it clear that the first £2,000 worth of shares will not give rise to a tax or NIC liability.
The Chancellor announced that the relevant statutory provisions will come into force on 1 September this year.
Commentary
The Government’s main target audience was “fast growing small and medium sized companies” many of which will be privately held. However, although promised, as yet there is very little Government guidance in relation to the valuation of shares in unlisted companies and this could limit take up by the type of companies for whom it was principally intended.
While employees may welcome the news that they could receive £2,000 worth of shares without a financial cost, concerns may remain about having to pay tax and NIC (on the value of shares above £2,000) in respect of shares which may fall in value.
For some, the capital gains exemption may offer little attraction as they may judge that a gain on the sale of these shares is likely to be covered by their annual tax-free capital gains tax allowance (the annual exempt amount) which is currently £10,600.
Interest in the exemption is likely to be confined to more highly paid employees with sufficient income that their annual exempt amount is phased out or who have a significant share portfolio where the annual exempt allowance can be used against other gains.
In a very recent development, however, the House of Lords have voted against these proposals. It remains to be seen now whether the Coalition majority in the House of Commons will overrule this (as they could) or whether the Chancellor will abandon the idea of employee ownership status in face of what appears to be significant opposition.
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