A new scheme which allows companies to give employees shares in return for reduced employee rights could bring benefits for the right businesses and their employees, advises Baker Tilly.

Businesses most likely to be benefit include high-growth companies, or those in financial difficulty with turnaround potential.

The new ‘Employee Shareholder’ employment status, which comes into effect from 1st September, enables firms with more than 250 employees, or those which for any other reason cannot enter into ‘Enterprise Management Incentive’ share option schemes, a means to incentivise employees by offering them shares in a tax-efficient manner.

Under the scheme, a company offers shares to employees in exchange for giving up certain employment rights, such as the right (in certain specified circumstances) to claim unfair dismissal, or statutory redundancy payments, or to request flexible working arrangements.

The key benefits of the new ‘Employee Shareholder’ status include:-

  • Up to £2,000 worth of shares may be awarded to the employee shareholder tax free, and a further £48,000 may be awarded subject to income tax and national insurance.
  • The Employee Shareholder’s gains on the eventual disposal, or transfer of the shares, are generally exempt from capital gains tax.
  • The company enjoys a corporation tax deduction equivalent to the total value of the shares granted to the employee at the time of issue.

Martin Benson, London Head of the Employer Consulting Group at Baker Tilly, said, ‘The launch of this new share scheme is particularly well timed now that there are signs of economic recovery.  It provides a means for companies with limited cash resources to incentivise their employees now, without the need for a large cash outlay, while at the same time gaining greater flexibility to manage their workforces.

‘There will be significant upside potential for employees participating in the scheme. Shares awarded now will likely be at low valuations and so have potential for substantial tax-free capital gains as the recovery continues.

‘Some employees will be reluctant to relinquish some of their employment rights in exchange for tax-advantaged shares, however the scheme has some compelling features both for both the employer and employee and could well be attractive to businesses with the right characteristics.’