The Budget made a significant change to the tax free status of Employee Shareholder Shares (ESS). By way of reminder, under ESS, a company can award its employees shares with certain tax benefits associated with them. Most significantly, for arrangements established before the Budget there is a complete Capital Gains Tax (CGT) exemption on the disposal of the first £50,000 worth of ESS shares, as valued on the date they were acquired. In return for ESS shares, the employee is required to give up certain statutory employment rights, including statutory redundancy and unfair dismissal.
So what has changed? For any arrangements established after 16 March, the Budget has introduced a cap on the amount of gains that can qualify for CGT exemption. This is set at a lifetime limit of £100,000. This is a big change, intended to stop/make ESS less attractive to certain users benefitting in cases where it was never intended.
Is ESS still relevant? Yes, it is likely to still play an important part in incentive arrangements, but there will now need to be more interplay between ESS and securing entrepreneurs' relief on gains above the cap and/or sitting ESS alongside an Enterprise Management Incentive (EMI( plan. This can secure a 10% rate with less than a 5% shareholding.
For further information on ESS or any other executive or employee incentive arrangements, please contact Stephen Diosi.