Employee Shareholder Status: worth a chance?

Posted by RM2 at 15:51 on 16 Nov 2014


Last month we discussed the possible threat to the Company Share Option Plan (CSOP), due its declining use, and put forward our argument to keep the plan in place.

We now take a closer look at another share plan that could potentially face the axe – the Employee Shareholder Status (ESS) – under plans that were announced by the Shadow Chancellor at this month’s Labour Party Conference in Manchester.

How does it work?

The ESS was introduced in September 2013, and is often referred to by the somewhat evocative term, ‘Shares for Rights’. The reason? In order to become an Employee Shareholder (a new status of employment), employees will usually need to forgo some of their employment rights. More on this below.

Under the ESS, Employees receive a gift of (at least) £2,000 worth of shares, completely tax free. Any gains received on the subsequent disposal of the first £2,000 of shares will also usually be exempt of tax (yes, really!).

For gifts of shares valued above £2,000, the excess of £2,000 will attract income tax and potentially NICs charges on receipt; however the gains on disposal of the first £50,000 (valued when shares were gifted) will still be exempt from CGT.

For capital growth on shares above £50,000, CGT will apply at the individual’s usual rate.

The rights, restrictions, and legal requirements

With the ESS the elephant in the room is, of course, that employees will usually have to give up certain employment rights relating to:

  • redundancy;
  • flexible working;
  • time off for training;
  • unfair dismissal (except for cases of discrimination, or where the dismissal is automatically unfair);
  • the notice period of return to work from maternity leave (sixteen weeks, as opposed to eight).

This will not always be palatable for both employees and employers alike. Employees may be put off by the loss of aforementioned rights, and employers run the risk of being perceived negatively by their workforce.

Nonetheless, it is worth considering that there are certain restrictions and requirements in place in order to ensure employees’ interests are safeguarded. For example, no existing employee can be forced to accept the new employment status. Additionally, the company making the offer must provide and fund (within reason) independent legal advice to each individual being offered the contract, regardless of whether they accept the offer or not.

It is also possible to offer an advanced contract whereby employment rights are retained.

When does it work?

Some of the main reasons people are choosing to offer ESS to their employees have been listed below. This isn’t an exhaustive list; however it aims to paint a picture of the various situations where a company may wish to consider an ESS.

Gifting shares to employees

Usually, on receipt of gifted shares, employees will be faced with an income tax charge, and potentially national insurance contributions, on the value of those shares. In such a situation they will not necessarily have any straightforward means of funding the payments. The ESS allows £2,000 of shares to be gifted exempt of income tax.

Targeted, with relatively low running costs

The only other arrangement that currently allows a tax exempt gift of shares is the all-employee Share Incentive Plan (SIP), under which employees can receive up to £3,600 of free shares each year. The shares are held in a SIP trust on behalf of employees.

The key reasons some companies are choosing ESS over the SIP are i) the ESS provides a mechanism to award tax free shares on a targeted basis, whereas a SIP must include all eligible employees; and ii) the annual administrative costs of running an ESS will usually be considerably lower than a SIP.

High growth companies

£2,000 may not sound like a tremendously large amount of money; however when one considers the potential uplift in a high growth company, the benefits of tax exempt gains begin to become very clear!

Growth/Flowering Shares can also be used in conjunction with the ESS, which can reduce the initial value of the shares in order to ‘fit’ more inside the £2,000 tax exempt limit.

High level employees

In certain senior roles within a company, many of the employment rights highlighted above may not apply. In such a situation, it is worth considering whether the level of reward potential available under an ESS would provide a suitable mechanism to incentivise key individuals, and focus their attention on maximising share value.


Many tax-advantaged share rewards, such as EMI options, must be made over shares in an independent company (i.e. Top Co). This often restricts the availability of tax-advantaged rewards in a subsidiary company. The ESS, on the other hand, can be offered over shares at subsidiary level.

We will be keeping our ears close to the ground regarding the future of the ESS. The arrangement may not be suitable for everyone; however there are certainly some instances where there is a great degree of potential gain, so it should not be dismissed outright before considering all the facts.

If you want to find out more about the Employee Shareholder Status, please call us on 020 8949 5522 for more information.