Simon Littlejohns, Partner and Head of Tax at Chartered Accountants Friend Partnership Limited, with offices in Birmingham and London, offers his latest thoughts on the Employee Shareholder Scheme (ESS).

The ESS rules were introduced in 2013 amid mutterings that there would be little enthusiasm from employees to the notion of giving up certain employment rights in return for free shares.  However since the new rules came in there has been a healthy appetite for ESS but perhaps not from those for whom the new rules were intended. 

If structured correctly an ESS is a very good way of incentivising senior management and staff with an equity stake which would be free of Capital Gains Tax )’CGT’).  This is far more attractive than the prospect of a 10% rate of CGT with an Enterprise Management Incentive (‘EMI’) share option scheme which has been the ‘normal’ way up to now for small and medium sized companies to incentivise key staff with an equity stake in the business.

An added attraction of ESS over EMI is the lack of conditions which need to be met by the employee and company.

In very simple terms with an ESS the employee gives up certain employment rights in return for free shares which are worth at least £2,000.

There are tax implications if the value of the shares given is over £2,000 but with careful planning the value of the shares can be managed so that the limit of £2,000 is not exceeded.  The ‘management’ of the share value can be achieved by imposing, and varying, the rights attaching to the shares.

In view of the generous tax breaks the ESS rules may be short lived in their present form so employers should be looking at this now.

A number of our clients are considering implementing an ESS – we are helping them with the design and implementation of the planning with the help of lawyers with particular expertise in drafting the necessary documentation and dealing with the employment law aspects.

Please contact Simon Littlejohns, or see our Briefing Note, for more detail on the rules.