Do you remember the announcement that employees could get free shares in return for waiving certain employee rights? The rules were brought into effect back in 2013, and since then very little has been heard about them. We are now, however, seeing a very interesting development in that tax advisors have realised that the employee shareholder status is particularly effective when used in the start-up/early stage of companies (when £2,000 worth of shares can be a meaningful percentage) and can create an effective shield against capital gains tax on the shares allotted to founder employee shareholders. Shareholdings up to 25% are eligible, so 5 equal founders could use this in a start up situation
The main draw-back of the original legislation, (apart from giving up certain employee rights themselves, which most founders would be willing to do) was the fact that each employee needed to be advised on the rights they were giving up – doing this for a large number of employees using an independent lawyer was always likely to add significant cost, on top of the £2,000 worth of shares needed to be given to the employees.
Recently, we have worked with other tax advisors in offering the legal advice to employees on a fixed price basis, and in the context of the start-up/early stage company this can be extremely effective. We have a mutual arrangement for clients of ours who wish to look at the scheme.
So, in summary, in a scenario where you are looking to establish a new company, you have proposed shareholders who will each be employees, and it is possible for the company or a director to pay up at least £2,000 worth of share capital on their behalf, an employee shareholder status arrangement should really be explored – the gains on those initial shares (and up to £50,000 worth of shares in total) are currently treated as tax-free, which is even better than the 10% entrepreneurs relief level of capital gains tax that most people are currently relying on in this scenario.
For further information please contact Richard Cobb.