From 1 September this year, employers have been able to award employees shares of the business, without them having to pay income tax and national insurance. And any gain upon disposal is free from capital gains and income tax.

What’s the catch?

While it may sound too good to be true, in return for the shares, employees must give up certain employment rights, many of which are seen as central to an employee’s employment security. For instance, to allow an employee to benefit from a tax free profit on sale they must give up their rights to:

• sue for unfair dismissal (subject to limited exceptions);
• statutory redundancy pay;
• requests for flexible working hours; and
• requests for time off for training or study.

Considering the above, it is no surprise that independent legal advice must be taken before an employee accepts a share award.

Additionally, there are limits as to the value of shares which can be awarded. Shares with a value of between £2,000 and £50,000 can be given, but only the first £2,000 is tax and national insurance free. The employer must therefore pay the tax (and possibly national insurance) on any excess over £2,000.

Other points to consider

The conditions attached to the relief are generally relaxed. As such:

• shares can be subject to restrictions, be of a new class, or be in a subsidiary;
• there is no minimum holding period;
• employees can be selected to participate rather than shares being offered to the whole workforce;
• shares can be bought back from exiting employees and tax benefits remain; and
• those with a holding of more than 25% cannot participate.

How does it work in practice?

While it is still early days, it is expected that there will be interest from private and public companies that will be looking to reward employees, although any benefits may be geared towards executives rather than the workforce in general. Furthermore, as there is flexibility as to what rights can be attached to shares, with correct structuring, current shareholder’s value can be protected from dilution following an award of shares.

Private equity firms are showing interest in the new relief as they look to incentivise incoming or incumbent management teams.

Are they here to stay?

The terms of the new relief are flexible and can offer significant benefits to both employees and employers. HMRC are however very wary of the potential for this new relief to be abused and it is understood to be keeping a very close watch on its application. It is also understood that there was some resistance from politicians to its introduction so it may only have a short shelf life.

I would suggest that employers and employees make the most of this relief while they can as I suspect that in its current form it may not be a long-term option. But they could make a great Christmas present while they are around.