20 Sep | Tax Services Industry Bangs the Drum for Employee Shareholder Status
Nowadays there are numerous situations in which enlightened employers might wish to incentivise key employees with shares which enable them to benefit from the growth of the company that they work for. There are, of course, many ways in which this can be done but clearly it is important that the benefits are maximised by taking advantage of any tax breaks that are available. Specialists in tax services at leading national accountants, Baker Tilly, have recently been reminding their corporate clients of the major advantages presented by a government approved but rarely used share incentive scheme called ESS.
The tax services professionals explain that ESS, which stands for employee shareholder status, means that qualifying employees are not liable for 28% capital gains tax when the shareholding is eventually sold. This CGT exemption applies on shares valued up to a maximum of £50,000 at the time they were issued. The only apparent drawback is that, in order to gain employee shareholder status, the employee has to forfeit certain statutory employment rights. However, experts in tax services point out that they can simply be replaced with contractual rights so this should not act as a barrier to introducing the scheme.
The tax services industry appears somewhat baffled by the low take-up of ESS so far and seems determined to spread its popularity. Considering how it saves gains tax of 28%, it is already proving most popular in situations where some corporate restructuring is taking place. Private equity firms find it especially appropriate when constructing incentive packages for senior employees since they would normally expect to exit a new investment within about 5 years of purchase. Similarly, providers of tax services suggest that ESS is ideal for management buyouts where senior managers may not already have worthwhile shareholdings.
Specialists in tax services add that, at the other end of the spectrum, smaller companies invariably reach a stage in their development where the founders feel it appropriate to provide some sort of equity participation for essential staff. However, they may not wish to give away very much, if any, of the value created so far. In these circumstances, specialists in tax services might well suggest that an ESS share scheme be structured in such a way as to reward employees for additional value created in future years.
Tax services professionals maintain that ESS is the most tax efficient form of employee share scheme available in the UK and is also extremely flexible from a commercial standpoint. It is no surprise therefore that they are advising employers considering key employee incentives to make sure that it appears much higher up on the menu than at present.
If you would welcome an initial discussion about employer solutions in general and ESS in particular, please do not hesitate to contact the tax services team at Baker Tilly who will be delighted to help.