News & Insights

Are employee shareholder share schemes beneficial?

Philippa Roles, head of Tax at FSP, considers how Employee Shareholder Shares can be used as a tool for incentivising employees.

Employee Shareholder Shares (ES Shares) are rapidly becoming a popular tool for incentivising and rewarding employees. To some extent when first introduced by the Government, ES Shares were dismissed as a bit of a gimmick, possibly because in return for receiving shares, employees had to give up certain statutory employment rights. As a result, the original publicity focussed on the erosion of employment rights, but now that the concept of surrendering rights in return for shares has been around for over a year, the tax planning benefits of ES Shares are becoming more apparent.

What tax benefits do ES Shares give employees?

In return for giving up certain statutory employment rights (which can be reinstated contractually if you wish), employees can be granted fully paid up ordinary shares at no cost to themselves provided that the ES Shares issued to any single employee have a market value of not less than £2,000. At the same time the employees can benefit from some generous tax breaks including:

  • if the market value of the shares issued is £2,000, the ES Shares will be free of income tax. If the value is more than £2,000 the excess will be taxed; and
  • provided that the market value of the ES Shares on issue was not more than £50,000, the disposal of the ES Shares will be free from capital gains tax.

Because the employee is required to surrender employment rights the employing company must pay the reasonable costs of the employee taking legal advice as to the nature of the rights being surrendered for the ES Shares.

Structuring the rights attaching to the ES Shares

Employees cannot be required to pay anything towards the ES Shares but the ES Shares must be fully paid up and so the company will need to ensure that it has capital available to it to cover the cost of the shares. Prior to the issue of the ES Shares, consideration will also need to be given as to what rights the ES Shares should carry.

  • Should the ES Shares be voting or non-voting shares?
  • Should the holders of ES Shares be entitled to receive a dividend on them?
  • Should good/bad leaver restrictions apply so that the ES Shares can be easily recovered on cessation of employment?

There are plenty of ways in which ES Shares can be used to incentivise employees. They may also help with succession planning, if there is a desire to sell the company to its employees in the long term. ES Shares do not have to be offered to all employees and could be restricted to certain key employees such as members of the management team.

The biggest constraint is the fact that the ES Shares issued must have a minimum market value of £2,000 at the time of issue which may prove to be too much for many small or early stage businesses. In addition, the ES Shares must be newly issued shares and so thought will need to be given as to whether the existing shareholders will be willing to have their own shareholding diluted accordingly.

If you would like to discuss any of the issues covered in this article or any other matter relating to employee incentives, please do not hesitate to contact Philippa Roles.