We have published a number of articles on the introduction of the new "employee shareholder" legislation, colloquially referred to as the "shares for rights" scheme.
Our most recent article (click here) sets out the detailed provisions applying to the new scheme.
As we commented at the time the proposals were first mooted, the main beneficiaries of the new scheme are likely to be found in private equity-backed and privately owned companies.
Not only are the tax breaks very generous but, particularly in start-ups, the individuals concerned are likely to be less risk averse and less concerned about the loss of some employment protection rights.
The new employee shareholder legislation provides an additional method whereby a company can incentivise its employees in a tax efficient manner.
These methods are summarised briefly below:
- the first is simply to issue shares to employees. Providing the shares are issued before the company has any value, the shares can be issued at a low price. Any increase in value should then only be subject to capital gains tax - possibly at 10% if the requirements for entrepreneurs' relief are met and provided the employee signs an election if the shares constitute restricted securities (ie, if they are subject to certain restrictions which reduce their market value). One of the main requirements for entrepreneurs' relief is that the employee has 5% or more of the company's share capital. Frequently, this will not be satisfied, in which case a company could consider issuing shares under the EMI share option scheme
- the EMI share option scheme is a scheme whereby a company can issue options worth up to £250,000 as at the date of grant. Provided the option price is market value as at the date of grant, there is no income tax or national insurance either at the time of the grant or on exercise of the option. Capital gains tax is payable on the sale of the shares. The notable difference with shares being issued is to disapply the normal requirement that the employee has to hold 5% or more shares, which means that shares disposed of on exercise of an EMI option can benefit from entrepreneurs' relief
- the final alternative is to issue employee shareholder shares. The main benefit of this scheme is that shares with an initial value of between £2,000 and £50,000 can be issued and there is no capital gains tax on disposal. The first £2,000 of shares awarded are also free from income tax and national insurance. There is no reason why they cannot be issued in addition to shares issued under the above described arrangements. In appropriate circumstances they offer an additional valuable tool in the tax-planner's arsenal
A recent article in the Financial Times reported that Whitworths, a private equity-backed company, had offered managers shares for rights worth up to £50,000 each.
This has already generated adverse comment from both Labour and the Liberal Democrats. Whilst it is unlikely there will be much change in the short-term, the next election is scheduled for 2015 and depending on the nature of the new government it may well be that the scheme has a fairly short "shelf life".
However, given the Government backing the scheme has received to date, it is unlikely to suffer the same fate of other tax structures and be subject to retrospective legislation.