Recruiting, incentivising and retaining key employees is vitally important for care operators. Tax efficient employee share schemes can be a way to achieve all of these objectives, whilst also preserving cash.
There are a number of different employee share schemes available and deciding on which scheme is right for the company can be a tricky task. In the past, the options have been a bit limited for care operators, as many were excluded as they do not meet the conditions to enable them to offer the most common tax advantageous share option scheme (Enterprise Management Incentives or EMI) to their employees.
A relatively new share plan that could be implemented by care operators is Employee Shareholder Status (ESS). Essentially, the employee is required to give up certain employment rights in return for a gift of shares worth at least £2,000 from their employer.
What are the benefits?
The employee receives shares with potential for future growth and returns with a preferential tax treatment. The employer benefits from incentivising and locking in key employees whilst reducing their exposure to certain potential employment claims.
The individual will only be subject to income tax and National Insurance on the acquisition of the shares in respect if any value given in excess of £2,000. On disposal, there is no Capital Gains Tax (CGT) charge providing that the shares were valued at less than £50,000 at the time of acquisition and agreement was entered into prior to 17 March 2016. In the 2016 Budget speech, the Chancellor announced a lifetime cap of £100,000 on Capital Gains for agreements entered into after this date.
What is the catch?
As mentioned, the individual will be required to give up certain employment rights in exchange for the shares. The employment rights sacrificed include; unfair dismissal rights (excluding automatically unfair reasons e.g. discrimination), statutory redundancy pay, the right to request flexible working and certain rights to undertake study or training.
It is, however, possible for the employer to offer some of the rights sacrificed back in the employment contract. The individual may, therefore, be left in a position not too dissimilar to a ‘normal’ employee, but with added incentivisation and tax benefits.
Why ESS might work for you?
- Growing business – ESS will be particularly attractive to growing companies. The individual will be incentivised to improve the performance of the company and will receive CGT free growth (up to £100,000).
- Entirely discretionary – The employer can choose who to offer ESS to. The shares are gifted free of income tax for the individual (providing the value does not exceed £2,000).
- Groups – ESS can be offered shares in a subsidiary company, unlike other HMRC approved schemes, which need to have shares issued by the parent company.
- Any trade or business activity – there are no exclusions based on the activities of the company.