The government announced in its Autumn Statement that it intends to abolish the tax benefits related to employee shareholder status (ESS) from 1 December 2016.
ESS was originally introduced as a new category of employment status whereby employees gave up certain employment rights (such as the right to a redundancy payment and protection from unfair dismissal) in return for a minimum of £2,000 shares in the employer’s business. The shares qualified for certain income tax and CGT reliefs, although following the March 2016 budget, CGT relief was restricted to a lifetime allowance of £100,000 for any ESS arrangements entered into after 16 March 2016.
The effect of this announcement is that ESS arrangements entered into before 1 December 2016 will continue to benefit from the tax advantages and that category of employee will still exist and will not be able to pursue the employment rights they gave up.
However, the government has said it will close this status to new users as soon as it has the opportunity to amend the relevant legislation and in any event any ESS arrangement entered on or after 1 December 2016 will have no tax advantages. This means that in reality there is no incentive for anyone to enter into this type of arrangement going forwards as the only effect is to give up employment rights with nothing in return.
The short timescale for this to be implemented has effectively ended this type of status for anyone who is not already an employee shareholder. Although originally introduced to give employees the opportunity to own a stake in the employer’s business with a view encouraging a greater contribution and productivity it has been increasingly used instead for tax planning purposes and this is what has prompted the government’s response.