With Employee Shareholder Status (ESS) having not even reached its third anniversary, today’s Budget potentially delivers a serious blow to its success.
The Chancellor has delivered a significant U-turn on a scheme that offers a tax efficient way of incentivising employees without the use of share options, or the usual bonuses and incentives that we so often see.
ESS was introduced on 1 September 2013 and allows companies to give shares worth more than £2,000 to employees. So long as that value was less than £50,000 there would be no capital gains tax on a future disposal of those shares.
For those employees who currently hold ESS shares there will be no change. However, for shares issued on or after 17 March 2016, there will now be a lifetime cap of £100,000 on any gains made.
ESS has been particularly popular amongst companies or groups of companies that have recently gone through a buyout and would like to gift shares to certain employees. It has also been popular with smaller companies who are not always able to be competitive on salary and therefore wish compensate with shares or share options. For a company with high growth potential, locking in talent presents a significant method is securing an important competitive advantage.
This CGT cap makes the ESS far less attractive than it currently is and we can anticipate a reduction in the number of new schemes being implemented.