Under the legislation that was introduced in 2013, employees who agreed to swap some of their statutory employment rights for shares under the ESS rules enjoyed a total exemption from CGT on the first £50,000 of shares (valued at the date of award). This relief was uncapped – if an employee received an award of shares worth £6,000 and went on to sell those shares for £6,000,000, then all of their gain would be exempt from tax (if the award was over shares worth £60,000, which were sold for £6m, then only the first £5m would be exempt).
For awards of shares under ESS made after midnight on 16 March 2016 the CGT relief is capped – an employee will only benefit from an exemption on his or her first £100,000 of gains. In the example given above, the employee would be treated as having made an exempt gain of £100,000 and the balance of the gain would be subject to CGT under the normal rules.
The limit is a life-time limit, but gains made on ESS shares awarded before 16 March 2016 do not count towards the limit and are not within the scope of the new limit.
ESS has been very widely used by companies to which the other statutory share schemes are not available (for example, companies backed by private equity firms or companies that do not meet the trading conditions for EMI) and the limitation of the relief will be seen as a disappointment by many share scheme specialists.
However, ESS provides a very flexible platform for employers to allow employees to become shareholders and the other benefits do not, at this stage, seem to have been withdrawn. These other benefits include:
- the ability to agree share values with HMRC before shares are awarded;
- an income tax exemption on the first £2,000 of shares awarded to an employee;
a relaxation of the rules on a company purchase of own shares, so that shares held by a leaver can be bought back by an employer company and still benefit from CGT treatment.