During his Autumn Statement last month, Chancellor Philip Hammond announced that the tax advantages linked to employee shareholder status (ESS) shares were to be abolished for arrangements entered into on or after 1 December 2016 (or, in limited circumstances, 2 December 2016), with the status itself being closed to new arrangements ‘at the next legislative opportunity’. The perceived rationale for this curtailment is that the status has been abused and primarily used as a tax planning vehicle for high earners.
The basic concept underpinning ESS is that employees receive at least £2,000 worth of shares in their employer (or its parent company) in return for giving up certain employment rights. For arrangements entered into before the beginning of December 2016, certain tax advantages are enjoyed by scheme participants in relation to the ESS shares they acquired.
Employer uptake for ESS schemes was initially slow; however, after the introduction of the concept back in 2013, they gained in popularity, particularly up to March this year, when the Government placed a cap on the tax benefits enjoyed by new scheme participants. The general consensus now is that, because the associated tax benefits have disappeared in their entirety, very few new ESS schemes will be put in place before the impending changes are made to the statute book.
The impact of the Autumn Statement on ESS schemes does not mean that tax-advantaged employee share schemes are a thing of the past. Indeed, enterprise management incentive (EMI) schemes are currently and will inevitably remain a popular choice, particularly for small, (potentially) high-risk trading companies which are able to meet the scheme eligibility criteria. Company share option plans (CSOPs) and save as you earn (SAYE) schemes will continue to be available for larger employers. In addition, there are non tax-advantaged schemes available to companies, including long-term incentive plans (LTIPs) and phantom option plans. Finally, the acquisition by employees of ‘growth’ shares in their employer (whose value is in some way linked to the future success of their employer) has continued to gain in popularity.
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