Could this be a useful tool for your care company? If you wish to incentivise your management team by giving them an interest (however small or even just in the growth from this point) in the company, then this could well be something of interest to you!
Why might you think about this?
We all know that a care business is a people business and the growth is largely down to hard work, effort and commitment of the staff. There are quite often key personnel in your business, where it might be useful to have them “onside” to help maximise your value in readiness for the ultimate sale. If they were able to have a very small shareholding that incentivised them to help you grow the business and stay on when you do sell, it could all be very attractive!
How does it work?
The employee needs to be issued with new shares with a value of at least £2,000. If the shares are worth £2,000 then there is no tax on the issue, whatsoever. If they are worth more than £2,000 then there is an income tax charge on the excess only. There are ways in which one can create and issue shares that “largely” do not give away past value but only share in future growth. This type of “structuring” can make this really interesting.
This is a relatively new status that can be adopted by workers, whereby they give up some of their employment rights in exchange for some shares in their employer. As the arrangement involves the issue of shares, it can only apply to those employed by companies (not partnerships or sole traders).
You may be wondering why an employee would want to give up their employment rights for the potential of a capital gain in the future. Well, firstly, they do not give up all of their rights, only four are sacrificed. The rights that many care employees would see as being the most important; statutory sick pay, maternity pay, National Minimum Wage and paid annual leave remain.
The four statutory employment rights sacrificed are:
- Unfair dismissal rights (apart from for automatically unfair reasons, such as discrimination and health and safety).
- Statutory redundancy pay.
- The right to request flexible working (except in the two weeks after returning from parental leave).
- Certain rights to request to undertake study or training.
However, employers can choose to offer contractual rights that are more generous.
The arrangement is particularly well suited to care businesses with a prospect of significant growth. Employees may be more likely to take up the new status, if offered, where they can see they are likely to be able to gain significantly from the shares issued.
Another attraction for employees is that the shares, as well as having potential for growth, come with tax benefits. There is income tax relief available on the initial transfer and a Capital Gains Tax (CGT) exemption on an eventual sale of the shares.
Some of the detail
The shares must have an actual market value (after taking into account any restrictions on the shares) of at least £2,000, when they are issued. There is no income tax or National Insurance (NI) on this amount as the employee is deemed to have paid £2,000 for the shares. Any excess over the £2,000 will be subject to tax and NI, but it is possible to ensure the value is very close to £2,000!
If the shares have an unrestricted market value (ignoring any restrictions placed on the shares) of less than £50,000 at acquisition, they will be exempt from CGT when sold. This means that the employee could benefit from growth in the company, tax free.
As with all arrangements with tax advantages, there are conditions to be met (the Chancellor doesn’t give anything away!!). In this case there are six:
- The individual and the company must both agree to the change of status.
- The relevant shares must be in the employer company or its parent and be worth at least £2,000.
- The individual must not pay for the shares in any way.
- The employer must give the individual a written statement outlining the Employee Shareholder Status (ESS).
- The employer must pay for the individual to take advice from a relevant independent advisor on the written statement.
- The individual must not accept or agree to the ESS until seven days after they have received the independent advice.
The written statement
There is a prescriptive list of what the written statement must include because there is great flexibility for the company to choose the rights and restrictions over the shares (this is a really positive part for the employer!). It needs to be clear between the two parties what is being offered. The main points are that it should cover the statutory rights sacrificed, the rights and restrictions attributable to the shares and the longer notice periods attached to ESS. Those under ESS must give 16 weeks’ notice of early returns from maternity, adoption or additional paternity leave.
The company can choose the shares’ voting rights, rights to dividends and rights to capital. All of this must be disclosed in the written statement, together with how any of the rights differ from those of the company’s largest share class.
The shares can be ordinary or redeemable, and the company can choose to make them redeemable at their option rather than the employee’s if they wanted. Furthermore and as mentioned above, the company can decide to make the issued shares ‘growth’ shares, where the employee will only benefit in the event that certain performance targets are met, or there is an uplift in value.
Common restrictions placed on shares include restrictions over the transferability of the shares and drag-along and tag-along rights, which force a sale if the majority have agreed to sell.
Things to consider
Junior employees are less likely to want to transfer to ESS, as the potential tax savings and growth on the shares is likely to be worth less to them than the employment rights given up. This status will appeal more to higher earning management where the tax savings may be significant and to be honest, that is probably what one should be considering from a commercial perspective anyway.
Some employers may feel that they don’t want to be seen to be asking employees to sacrifice employment rights from a PR perspective. This is less likely to be an issue if the status is only offered to senior employees.
For more information contact Andrew Brookes, Partner and Head of Healthcare at Hazlewoods on 01242 246670 or firstname.lastname@example.org