The 'Employee Shareholder' was a type of employment category that came with tax benefits. This ceased in 2016.

This is a freeview 'At a glance' guide to Employee Shareholder status. 

An employee shareholder falls somewhere between an employee and a worker in terms of employment rights. 

This special type of employee was given special tax reliefs: this did not last long and tax benefits to new employees were removed from 2016.

Introduced by the Growth and Infrastructure Act 2013, 'the employee shareholder' gives up certain employment rights in exchange for £2,000 of tax-free shares which are exempt from Capital Gains Tax (CGT) on disposal.

In his Autumn Statement 2016, the Chancellor announced the removal of tax reliefs for individuals entering into Employee Shareholder Status (ESS) agreements on or after 1 December 2016.

Under the rules for employee shareholders who entered into agreements before 1 December 2016

Employee Shareholder tax implications; at a glance

  • An employer may make an award of shares, fully paid, to a new class of employee; an employee shareholder with a market value of at least £2,000.
  • Up to £50,000 of employee shareholder shares will be exempt from Capital Gains Tax on disposal.
  • Shares awarded in consideration of an Employee Shareholder Agreement entered into on or after 17 March 2016 will only be exempt from CGT on gains up to a limit of £100,000.
  • The first £2,000 of the share award is made tax and National Insurance Contributions (NICs) free, the balance is subject to Income Tax in the employee's hands, taxed under the employment related securities regime (the shares will be restricted securities) and if the shares are readily convertible assets, subject to NICs.
  • Up to 1 December 2016, this scheme provided many positive tax planning opportunities for smaller employers see Employee Owner Status: tax and planning for more details.

Income Tax and CGT reliefs are no longer available for individuals entering into ESS agreements on or after 1 December 2016.

Employment and company law implications (ongoing); at a glance

  • Shares offered to the employee shareholders may be of any type and may carry a range of rights, including rights to dividends and restrictions, including forfeit provisions. The employer company decides these.
  • Employees cannot be forced to dispose of their shares at an undervalue, although the company may well wish to set leaver provisions that determine the disposal value when an employee leaves the company.
  • Employee shareholders will be a new type of worker as they will give up certain UK employment rights on unfair dismissal, redundancy and the right to request flexible working and time off for training, and will be required to provide 16 weeks’ notice of a firm date of return from maternity leave, instead of the usual eight.
  • The House of Lords imposed certain amendments to the rules as first drafted which mean that an employer must provide legal advice and a cooling-off period before an employee is able to give up their rights to take advantage of the new share scheme.
  • Employee owner status will be optional for existing employees, but both established companies and new start-ups can choose to offer only this new type of contract for new hires.
  • Companies recruiting employee-owners will continue to have the option of inserting more generous employment conditions into the employment contract if they want to.
  • Companies of any size may operate this scheme, but it is principally intended for fast-growing small and medium-sized companies who want to create a flexible workforce.
  • Some employers may decide the ignore this scheme, but it may also be used with other schemes, for example, an EMI share option scheme.
  • ES shares may lose CGT exempt status following a reorganisation or exchange of shares.
  • See Employee Owner Status: tax and planning for guidance for employers.

Useful guides on this topic

Employment-Related Securities & Share Schemes
What are the tax consequences when a company gives shares to an employee or director? What are employment-related securities? What is best: shares or share options? How do you set up a share scheme?

EMI: Enterprise Management Incentive Scheme
What is the Enterprise Management Incentive (EMI) scheme? What's the difference between EMI and an unapproved share scheme?

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