Owner-employee share schemes – It will be a gamble for employees, says EY

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Patrick Stevens, tax partner at EY, comments on the Government’s new ‘owner-employee share scheme’, announced today:

“The owner-employee share scheme is an interesting and novel idea which, in theory, should strengthen the armoury of the UK’s high growth businesses.

“However the big question is whether employees will be attracted by this type of arrangement. Employees will be giving up their rights to flexible working, unfair dismissal and redundancy without knowing the potential upside gain or tax benefit in advance.

“For example, if the employer does badly, the shares that are being given to the employee could become worthless and therefore would be of no advantage. The Capital Gains Tax (CGT) exemption would also then be irrelevant. Even if the ‘gain’ on the share price is relatively small, they may not have been liable for CGT anyway – most people have a tax free annual CGT allowance of up to £10,600.

“On the other hand, if the shares sky rocket, increasing in value, there could be a substantial profit for the employee which would also be tax free. This would be of particular benefit to higher rate tax payers, who are subject to a 28% CGT rate. Employees will need to carefully consider their options but, for some, it will be a gamble either way.

“For the employer it will be an interesting exercise in deciding how many shares should be offered in this way, in order to make it an attractive package. Some employees will find such arrangements very attractive, whereas others will be more focussed on traditional employment relationships. A workforce that includes both categories may become more difficult to manage.”

He added: “It is not immediately clear whether the employee is actually gifted the initial shares – and whether they will be taxable - or whether they simply have the right to a notional gain on such shares. We will also need to see what terms can be put in place to determine what happens when an employee leaves.”