On 1 September 2013 a new employment status was introduced being ‘employee shareholder status’ where employees could forego certain employment rights in exchange for acquiring shares worth at least £2,000 in their employer company (or parent company).
The main aim of this scheme is to encourage employee share ownership but although there are tax incentives for using the scheme the employee will lose some employment rights.
The employee concerned with acquiring shares must receive advice from an independent adviser on the terms and effect of the employee shareholder agreement. The employer company will be required to meet reasonable costs for the advice to employee, whether the individual accepts the employee shareholder position or not, but this will not be treated as giving rise to a taxable benefit to the employee (see below for corporation tax relief).
There are tax incentives for the employee in respect of the shares which are detailed as follows:
- Income tax and National Insurance is not usually chargeable on the first £2,000 of share value received by an employee shareholder. As long as they meet certain conditions then employee shareholders are treated as if they have paid £2,000 worth for their employee shares. This means if an employee shareholder receives £2,000 worth of shares under the agreement no tax or NI is chargeable at the time of the award. If the award is worth more than £2,000 then tax (and NIC if applicable) is only chargeable on the value received in excess of £2,000. It will be dependent on the type of shares issued.
- There will usually be a capital gains exemption for gains on the disposal of up to £50,000 worth of shares received by the employee shareholder on shares that have met the criteria for the above tax relief.
These special tax rules for income tax only apply to the initial shares received when an individual becomes an employee shareholder. Shares issued later will be taxed in the normal way.
Where the employee shareholder or anyone connected to them have a ‘material interest’ in the company because they hold 25 % or more in the company then the special tax rules for income tax and capital gains tax will not apply and the employee shareholder shares are taxed in the normal way.
The employee will lose some employment rights such as some unfair dismissal rights, statutory redundancy pay but will retain rights such as statutory sick pay, maternity pay, paid annual leave etc – for full details see Gov UK - employee shareholders .
Employers who award employee shareholder status may obtain agreement of a proposed share valuation with HMRC.
The Employer may also be able to claim deductions for corporation tax relief on:
- the acquisition of shares by employee shareholders (subject to the normal qualifying rules).
- where a company meets the costs of advice provided to an individual considering an employee shareholder offer (providing these costs are incurred by the company wholly and exclusively for the purposes of its trade)
Further details on the above corporation tax relief can be found at HMRC - Employee shareholder
Employers will need to provide details of employee shareholder shares awarded on HMRC Form 42 (Employment-related securities) at the end of relevant tax year.
Please contact us for further advice on this new employment status scheme.
