Employee shareholders have different employment rights to employees, and are awarded at least £2,000 worth of shares in their employer or a parent company. There is no requirement for businesses wishing to offer an employee shareholder contract to obtain HM Revenue and Customs approval or agreement.
As an employer, it gives you a new incentive option to include in your employees’ overall reward package and brings greater flexibility for reward planning in general. Businesses awarding employee shareholder shares may propose a share valuation for tax purposes to HMRC’s Share and Assets Valuation team in advance of this award. Where possible, HMRC will agree this valuation, and this agreement will be effective for 60 days.
Becoming an employee shareholder is likely to be of most interest if you’re an owner-manager or a high-earner who’s looking to benefit from the capital gains tax (CGT) exemption. From the perspective of an employer, many of the changes also allow you to have a greater ability to forward plan for your business.
There are 6 conditions that must be met for someone to become an employee shareholder – whether as a new hire or an existing employee. The employer and the individual share responsibility to meet these conditions:
- The individual and the company must both agree that the individual will be an employee shareholder.
- The employer must give the individual fully paid up shares in the employer’s company or employer’s parent company, and they must be worth at least £2,000.
- The individual must not pay for the shares in any way.
- The employer must give the individual a written statement of the particulars of the status of employee shareholder.
- The individual must obtain advice from a relevant independent adviser on the terms and effect of the written statement. The company is required to pay for that advice whether the individual accepts the job or not.
- The individual cannot accept or agree to an employee shareholder job until 7 days have passed following receipt of the advice.
- The 7 days commence on the day after the advice has been received.
If the individual or the company do not undertake or comply with all 6 of these conditions, the individual will not be an employee shareholder.
The benefits of employee shareholder status
As an employee, if you’re given free shares from 1 September 2013 then you can choose to become an employee shareholder. By doing so you will lose certain statutory employment rights (e.g. the right to claim unfair dismissal, apart from the automatically unfair reasons, where dismissal is based on discriminatory grounds and in relation to health and safety) but you will receive income tax relief on the first £2,000 of free shares.
There will also usually be a Capital Gains Tax exemption for gains on the disposal of up to £50,000 worth of shares received by the employee shareholder. This is subject to the employee shareholder not having a ‘material interest’ in the company.