Partner Article

Cash for rights – any takers?

The Government’s ‘Employee Shareholder’ scheme, under which employees can trade some of their employment protection rights for shares, is to become effective in September. Although it’s received quite a bit of bad press, some potential users of the scheme have shown great enthusiasm for it.

The Government is keen to encourage employee ownership, and as a result, all of the various kinds of employee share plans are being simplified and made more tax efficient. This new scheme is particularly relevant to high growth companies, especially where the company has more than 250 employees or for any other reason does not qualify for ‘Enterprise Management Incentive’ share option schemes.

Of course there will be some employees reluctant to trade employment rights for shares with tax breaks, but once the employees in fast growing companies understand the limited nature of the rights they are giving up, then experience has shown that they can become very keen to take part.

Under the plan, a company may issue new shares to employees in exchange for the employee giving up certain employment rights such as the right (in certain specified circumstances) to claim unfair dismissal, to statutory redundancy pay, and to request flexible working arrangements and so on. The shares given to the employee have to be worth at least £2,000 when they are first awarded, but if they are worth more, the excess will be liable to income tax (and possibly National Insurance Contributions).

Provided the value on acquisition does not exceed £50,000 then shares can ultimately be sold free of all tax (i.e. there will be no income tax, NIC or capital gains tax, regardless of the price for which the shares are sold in due course).

So if the business succeeds, then the employee may sell his shares and realise a completely tax free capital gain. On the other hand, if the business suffers and the employee is selected for redundancy, then his payout will potentially be lower. It might be difficult to find enthusiastic volunteers for the scheme in the current economic climate, but the gamble could be worth it in the long run.

This was posted in Bdaily's Members' News section by Baker Tilly .