From 1 September 2013, employees will be able to receive shares in their employer tax free in exchange for giving up certain employment rights.
The new law
As we reported previously, legislation has been introduced to create a new category of employee – the employee shareholder. In return for giving up certain employment protection rights (the right to claim unfair dismissal, the right to redundancy pay, the right to request flexible working or undertake study or training) an employee shareholder is issued shares with a minimum value of £2,000. Income tax is only payable on the acquisition of such shares to the extent that their value exceeds £2,000. Any growth in value of the shares is exempt from capital gains tax if the value of the shares on acquisition is no more than £50,000.
Key points to note include:
- The shares must be issued free of charge to the employee
- Shares may be issued in the employing company or a parent company although not a subsidiary
- Non-UK registered companies will qualify
- A written statement must be provided to the employee in advance setting out full details of the shares and the rights they carry
- The employee must first have received advice from a “relevant independent advisor” – for example, a lawyer or trade union or law centre – the reasonable cost of which is paid for by the employer
- There will be a seven day ‘cooling off’ period, during which any acceptance of employee shareholder status will not be binding
- If these terms are not complied with then all employment rights will be retained
- Subject to complying with the above terms, employers will be free to offer new roles only on the basis of employee shareholder status
- Existing employees will be free to accept the offer of shares or reject them and remain on their existing terms. There will be protection for any employees who are subjected to a detriment because they refuse such an offer.
The government has now published guidance on employee shareholder status for both employers and employees.
Despite the broadly negative reaction to the consultation on employee shareholder status, there are likely to be a number of companies – particularly start-ups – that are exploring whether it may be appropriate for their business. The legislation also presents opportunities for other larger companies who wish to give their employees the opportunity to acquire shares in a tax efficient manner.
However, the level of enquiries to the Department for Business Innovation and Skills has so far been very much below that expected. Although for start-ups the attractions for both employer and employees are clear, the valuation issues may be a major stumbling block. The shares acquired by an employee must be worth at least £2,000, which may be a significant proportion of a company’s share capital. If the shares cannot be shown to have this value, the shares would not benefit from the tax advantages and the employee would still retain the employment protection rights.
How can we help?
Our team at Abbiss Cadres is ideally placed to assist employers that are interested in devising a scheme to take advantage of employee shareholder status in their business.
- advise companies on the legal and tax opportunities and challenges of the new employee shareholder status
- draft the terms of the scheme to ensure it is not only compliant with the statutory requirements but fit for purpose in your business
- prepare the necessary contractual documentation
- devise a communications plan to ensure the scheme is presented in an attractive, easily understandable way to get maximum engagement amongst the target employee group
- provide independent advice to employees on employee shareholder status
For further information or to discuss the issues raised, please get in touch.