Employee Shareholder Shares – cap imposed

Since 1 September 2013, employees have been allowed to acquire shares in their employing company or its parent, in exchange for giving up certain statutory employment rights. In return for giving up such rights, employees have been entitled to benefit from a favourable tax regime in relation to their shares. The shares are known as “employee shareholder shares” or ESS. Under ESS as it currently stands, an employee can acquire shares with an initial value of between £2,000 and £50,000. Provided that the legislative requirements are satisfied, no capital gains tax will arise when the shares are ultimately sold.

The government has now placed a cap on the amount of gains that can be exempt from capital gains tax when the shares are sold. There will now be an individual lifetime limit of £100,000 on the amount of gains that are exempt from capital gains tax. This measure applies to the disposal of shares acquired under Employee Shareholder Agreements entered into after midnight on 16 March 2016. To the extent that Employee Shareholder Agreements are entered into on or after 17 March 2016, the first £100,000 of any gains received by an individual will be exempt from CGT and the excess will be subject to CGT at the prevailing rate (decreasing to 20% for additional and higher rate taxpayers from 6 April 2016, or 10% for basic rate taxpayers).

It is not entirely surprising that there has been some limit placed on ESS because the tax relief was exceedingly generous and it has been widely used. The good news is that it has not been repealed altogether. Combined with the reduction in the rate of capital gains tax, it will still be attractive to issue ESS to employees rather than, say, options or cash alternatives. However, we anticipate that this limit is going to reduce the attractiveness of ESS for PE investors or other companies that anticipate large gains. Entrepreneurs’ Relief may still be available for employees and directors with at least 5% of the nominal share capital and voting rights and the new “Investor’s Relief” may also be available (broadly an extension of Entrepreneurs’ Relief to non-employee/director shareholders that hold their shares for more than 3 years), both of which will be subject to an individual lifetime limit of £10,000,000.

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