Employee Share Incentives: a sprinkling of sugar but a cap on ESS

Andrew Quayle, Nicholas Stretch, Graham Muir and Catherine Merry

In a surprise move in today’s Budget, the Chancellor has slashed the rate of capital gains tax from 28% to 20% (or, for basic rate taxpayers, from 18% to 10%).  These changes come into effect from 6 April 2016.  This will be great news for any employee holding shares in their employer company and, in particular, offers a further boost to the benefits of Save-As-You-Earn (SAYE) and Company Share Option Plans (CSOP).

In less happy news, the Chancellor has placed a lifetime cap on the amount of tax benefit that an employee can enjoy on shares acquired through employee shareholder status (ESS).  ESS is an arrangement under which an employee gives up certain statutory employment rights in exchange for an award of shares in his or her employer.  The ESS regime provides generous tax reliefs for employees and, in particular, ESS shares have (until now) been free from capital gains tax on all future growth in value.

The changes announced today will place a £100,000 lifetime cap on the amount of gain an individual enjoys from ESS shares which is free from capital gains tax.  In effect, and when coupled with the falls in capital gains tax rates, the maximum tax saving that can now be achieved by an employee through ESS is £20,000.  These changes will affect all ESS arrangements entered into after today (gains derived from ESS shares issued before today will not count towards the lifetime limit and will continue to enjoy the full benefit of the relief from capital gains tax). 

Despite today’s changes, we expect ESS to continue to be a popular means through which companies incentivise their senior employees.  Indeed, one of the main benefits of ESS (aside from the capital gains tax saving) is that HMRC offers a streamlined service through which companies can pre-agree the current market value of their shares for tax purposes before they are awarded to employees.  Given the removal of the ‘post transaction valuation check’ from the end of this month, this benefit will become even more important.  Nevertheless, where employees are given a free choice by their employer company to receive shares through ESS or outside the scope of ESS (which is commonly the case), we do anticipate that the new cap will discourage some employees from taking advantage of ESS: the more limited tax benefits associated with ESS may simply not be sufficient compensation for the forgoing of statutory employment rights.

Please do get in touch if you would like to discuss the implications of today’s changes for your share plan arrangements. We also have a range of briefing notes providing further background information, including on SAYECSOP and ESS.


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