Employee Shareholder Status: tax benefits abolished

The government has recently announced that as of the 1^st December 2016, the income tax and capital gains tax reliefs associated with employee shareholder status (ESS) are abolished. Obtaining ESS had been a way for companies to gift shares to its employees without the employee incurring an income tax charge in exchange for the employee waiving certain employment rights. However, the government has stated that there is evidence that ESS had been used for tax planning and the abolition of the tax reliefs is in response to this evidence.

Although this announcement may appear surprising, the restriction of the CGT relief available for ESS shares earlier this year indicated the direction that the government might take in future over ESS. Nevertheless, for those employees and companies who entered into ESS arrangements before the 1st December 2016, the tax advantages will continue to apply. For small companies looking for a tax efficient way to transfer shares to employees going forward, the main scheme left is the enterprise management incentive scheme (EMI). Under EMI, employees are granted share options that can provide a number of tax benefits to both the company and the employees. However, for the company and the employee to be eligible for the scheme there are a range of tests that need to be met.