Employee shareholder status abolished following ‘abuse’

The only genuinely unexpected measure in yesterday’s Autumn Statement is the ending of favourable tax treatment of employee shareholders, a policy introduced in 2013.

Employee shareholder status was originally intended as a way of allowing small companies to grow rapidly without committing themselves to a large permanent workforce with full employment rights.

Employers were permitted to grant these employees up to £50,000 worth of tax-free shares in the business in return for the employees’ waiver of their employment protection rights. Income tax and national insurance contributions were not chargeable on the first £2,000 of the share value received by the employee.

The relief was considered very generous and it has been widely used – mainly, it seems, by high-earning employees as a method of avoiding income tax and capital gains tax. It even attracted significant interest from private equity firms, as it allowed participants in a management buy-out to avoid CGT on their shareholdings when they exited the company.

HM Treasury’s recognition of this fact was reflected in the Budget announcement in March this year, which placed an immediate £100,000 lifetime limit on the CGT exemption for an individual’s disposal of employee-shareholder shares.
Now more drastic action has been taken. All tax advantages for employee-shareholders are being removed for new schemes launched from 1 December 2016

As of 1 December 2016, the tax benefits of ESS will not be available to new entrants. This offers a short window for outstanding agreements to be finalised.

The government will legislate to close the status itself to new entrants at the ‘next legislative opportunity’. However, this does not affect any such shares that have already been issued; they can still be sold free of CGT. However, if a company buys back ESS shares from an ex-employee, this will be treated as an income distribution and not a capital receipt.

The decision to abolish the ESS tax benefits is surprising, particularly given the lifetime cap imposed in the March 2016 Budget and through informal messaging from HM Treasury since then that it would continue.