Lower exemption for employee shareholders

Although employee-shareholder style contracts have not been widely used by rank and file employees, they have been popular with start-ups with high growth potential. The capital gains tax (CGT) exemption is particularly attractive to key employees and directors because they have been able to enjoy the growth in share value in a tax-efficient manner.

The basic idea is that an employee-shareholder receives tax-advantaged shares in exchange for giving up certain employment rights. The employee-shareholder must receive shares in their employing company with a minimum value of £2,000, but can benefit from a CGT exemption on the disposal of up to £50,000 worth of shares. The shares are valued at the time they are received by the employee, and previously the exemption would have applied regardless of their increase in value – even if sold for millions of pounds.

However, the amount of exemption is now subject to a £100,000 lifetime limit where shares are acquired under an employee-shareholder agreement entered into on or after 17 March 2016. Any past or future gains arising from prior shareholder agreements do not count towards the £100,000 limit.

For example, an employee sells £50,000 worth of these employee-shareholder shares with a gain of £250,000. If the employee-shareholder agreement was entered into before 17 March 2016, the £250,000 gain would be exempt from CGT. If the agreement was later, £150,000 of the gain would be taxed.