Under the Government’s proposed initiative to introduce an “employee shareholder” status, employee shareholders will relinquish certain statutory employment rights in return for shares in their employer company on the basis that any future gains on those shares will be exempt from UK capital gains tax.
In a previous update we highlighted some key areas of uncertainty from a tax law perspective.
Today’s Budget responded to one of these concerns by announcing that the first £2,000 of shares acquired pursuant to an employee shareholder agreement would be exempt from income tax and National Insurance contributions.
However, would-be employee shareholders will need to consider whether giving up potentially valuable employment rights for an immediate tax saving of less than £1,000 is a worthwhile trade-off.
As noted in our previous update, given the existence of the capital gains tax annual exemption (and based on its current amount), employee shareholder shares worth £2,000 on acquisition would have to increase in value between acquisition and sale by more than 530% before an employee shareholder will make any tax savings by virtue of the CGT exempt-status of his employee shareholder shares. Where the availability of spouse or civil partner transfers are also utilised to the fullest extent, employee shareholder shares would have to increase in value by over 1060% before an individual will see any tax benefit to being an employee shareholder.
Given the additional uncertainties around the process by which employee shareholder shares can be forfeited on termination of employment, and taking into account the company costs (both valuation and legal) involved in establishing and maintaining employee shareholder arrangements, it remains to be seen how attractive the proposals will be viewed by employers.
As was clearly communicated by the responses to consultation, the view of tax and employment professionals has, sadly, been a resounding “thumbs-down” to this latest Government initiative.