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Could employee shareholder status work for you?

The new status of employee shareholder came into effect on 1 September 2013.  Nicola Hewitt, Tax Advisor at Barber Harrison & Platt (BHP) Chartered Accountants said “in spite of the debate surrounding these new rules and, in particular, concerns regarding the employment law implications, companies should still consider employee shareholder status, as it has the potential to offer generous benefits”.

In summary, companies can now offer their employees free shares in the company, worth a minimum of £2,000 and, in return, the employee must relinquish a defined group of employment protection rights, including the right to apply for flexible working, to receive a statutory redundancy payment and certain unfair dismissal rights.

Nicola said “From the employee’s perspective, the most significant benefit of the new rules will be the fact that the shares (up to the value of £50,000 when issued) will be exempt from capital gains tax on a later disposal or transfer.  This means that, for companies considering a future sale, offering shares under an employee shareholder agreement to key employees could prove to be an excellent way to incentivise these individuals.  Offering shares to employees by way of employee shareholder status links their interests with the value of the company and enables them to share in the potential sale proceeds in a tax efficient manner.  From the company’s perspective, there will be a corporation tax deduction equivalent to the value of the shares awarded”.

Nicola continued “Of course, there are upfront costs for both the employee and the company. Only the first £2,000 worth of shares awarded are exempt from income tax and national insurance, so employees receiving shares worth over £2,000 will have an immediate tax liability.  The company will be required to fund independent legal advice for any employee considering becoming an employee shareholder, which could be costly if applied to large sections of their workforce.”

Given the implications for employment rights, the take up of employee shareholder status is not expected to be high.  However, Nicola says “In the right circumstances, employee shareholder status could be a valuable option when looking to reward key employees, particularly where there is the potential for a future exit. The key to maximising the incentive is to act quickly and specialist advice should be sought before establishing a new company or preparing to market a company for sale”.