ESS was introduced in 2013 and allows employees to receive shares worth at least £2,000 in exchange for giving up some of their statutory employment rights. No income tax charge will arise under the employment related securities provisions on the first £2,000 of value. On the ultimate sale of the shares, which would include a company purchase of own shares, the employees are exempt from capital gains tax on the first £100,000 of gains that they make. Before entering into such arrangements employees are obliged to take independent legal advice.
The income tax and CGT exemptions will no longer be available with effect from 1 December 2016 for any ESS agreements entered into on or after that date. This will allow an individual who has taken their legal advice before 23 November 2016 to enter into their ESS agreements and obtain the income tax and CGT advantages. These agreements must be entered into before 1 December 2016. However, where legal advice was taken on 23 November 2016 prior to 1.30 the effective date will be 2 December 2016.
Despite the restriction introduced last year to limit the CGT exemption to £100,000 of gains, the Government has been concerned that ESS has not been used as intended. Many high earners have secured CGT exemption via company purchase arrangements.
Companies that have not implemented ESS agreements as at 23 November 2016 (subject to legal advice) will now be prevented from using the scheme to incentivise and retain key employees forcing many to reconsider the use of alternative arrangements such as the use of EMI or CSOP share plans.