The UK Government appears to be firmly committed to its idea of employee shareholders – employees who give up their employment rights in exchange for tax-free shares. Is this, as some have suggested, a half-baked plan that is doomed to fail or should companies and employees grab the Chancellor’s gift horse (just don’t look too closely at the teeth)?
The proposals for employee shareholders have widely been branded as ill-thought-out and unfair on employees, particularly by employment advisers. But from a tax point of view, are they really that bad?
The key idea is to allow a company to give shares worth between £2,000 and £50,000 free to employees in exchange for them giving up certain employment rights. Disposal of the shares will be free from capital gains tax, no matter how big the gain. Sounds pretty good when you put it like that.
The proposals were heavily criticised when they were announced last October and the Government admitted that very few responses to its consultation welcomed the proposals. Despite this, it pressed on with legislation which, after a couple of maulings in the House of Lords and last-minute Government concessions, was finally passed at the end of April. So employee shareholder agreements can be entered into from 1 September 2013.
Think Before You Speak?
There was a real sense of “making it up as we go along” with the proposals. For example, the Government has said employees must not pay anything for the shares but they must still be issued fully-paid, making it unclear how the company law requirements are supposed to be satisfied. And it was quite some time before the tax issues were dealt with.
The shares awarded to the employee must have a minimum value at the date of issue of £2,000 and a maximum value of £50,000 (more shares can be given but these will not be CGT-free on sale). Some will see this as a generous bonus by the employer. How valuable are these particular employment rights anyway to the majority of employees?
But if an employee is given shares, income tax and (often) National Insurance contributions will be charged on the value of those shares. So the employee is effectively paying (tax) to give up their employment rights and receive the shares. Suddenly the bonus doesn’t feel quite so generous anymore.
The Government has reduced the up-front tax impact for employees by allowing the first £2,000-worth of shares to be given income-tax free. That’s fine if you only get the minimum value of shares, but it is not much use if you get £10,000 or even £50,000 worth.
Valuation of shares will clearly be crucial and the promised Government guidance is awaited.
Don’t Give Up Hope
George Osborne said he wanted to create a nation of employee shareholders with his proposals; it is hard to see the current proposals achieving this. However, in the right circumstances an employee could benefit considerably. After all, they are given free shares and will get tax-free proceeds when the shares are sold.
Management teams on private equity transactions may be one beneficiary of the proposals. Sweet equity awards could be made to fall within the scheme with minimal impact on traditional private-equity structures. The individuals involved are, by nature, entrepreneurs who are prepared to accept some risk and are less likely to be concerned about giving up their employment rights. Add into the mix the tax-free proceeds and there may be a use for this scheme after all. Only time will tell.