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Budget 2016: Employee Share Schemes: some tax rabbits and caps

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Reduction in CGT rates: the rabbit out of the hat

The (tax) rabbit out of the hat at Budget 2016 was arguably the surprise announcement that the headline rate of Capital Gains Tax (CGT) would be cut from 28% to 20% for higher rate taxpayers and from 18% to 10% for basic rate taxpayers. Of course, there were exceptions to this including UK residential property and the holders of carried interest (typically, private equity professionals).

Of course, this is a fillip for any employee who holds shares in their employer company and, boosts the benefits of Government approved schemes such as Save-As-You-Earn (SAYE) and Company Share Option Plans (CSOP).

Cap on the limit of benefits from Employee Shareholder Status regime

Speaking of headgear, in less positive news, the Chancellor has placed a cap on the value of tax benefits that an employee may enjoy on shares acquired through the employee shareholder status (ESS) regime.

As you may remember, ESS is a regime that allows an employee to sacrifice certain statutory employment rights in exchange for shares in their employer.

But why might one do such a thing, I hear you ask? Well, the ESS regime provides generous tax reliefs for those employees who enter in to this modern day Faustian bargain. In particular, ESS shares were totally free from capital gains tax on all future growth in value. This has now been capped. Spoilsports.

These proposals will place a £100,000 lifetime cap on the amount of gain an individual enjoys from ESS shares which is free from capital gains tax.  In effect, and when one takes in to account the reduced rate of capital gains tax rates, the capped tax benefits that can now be achieved by an employee through this regime is £20,000.

These changes will affect all ESS arrangements entered into after the Budget. For the avoidance of doubt, gains from ESS shares issued before the Budget will not count towards the limit and one can carry on regardless.

ETC’s view

Our view is that ESS should continue to be popular and attractive means by which companies incentivise their key employees. Especially in start-up and growth businesses. However, the requirement to give up employment rights for potentially a capped tax benefit may cause potential recipients to think longer and harder before entering such a deal.

Another attractive feature of the ESS regime is that a Company may pre-agree the current market value of their shares with HMRC before employees receive any shares.

 

If you, or your clients, would like to discuss the implications of the Budget changes in this area then please get in touch.

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