Employee owners to receive CGT relief

Budget 2013: The government has announced it will fund the introduction of a capital gains tax (CGT) relief on the sale of a controlling interest in an organisation into an employee ownership structure.

The government will fund the CGT relief, which it aims to introduce in the Finance Bill 2014 in April 2014, by providing £50 million annually from 2014-2015.

The government also said it would look at further incentives in this area, including measures targeted at employees through indirect ownership models.

As announced on 8 October 2012 and confirmed in the Autumn Statement 2012, the government will exempt from CGT gains on up to £50,000 of shares received by individuals adopting the new employee ownership status.

The CGT exemption will apply to shares received from 1 September 2013, when the new status comes into force.

Bernadette Daley, employment partner at law firm Mayer Brown, said: “At best, the proposed employee shareholder status might be used by start-ups and small organisations that look to take advantage of the exemption from capital gains tax.

“However, these benefits could be offset by the problems caused by determining the value of the shares and the administrative burden in drawing up contractual arrangements to deal with buy-back of shares in the event an employee leaves.

“But the scheme would not cover the public sector, partnerships, charities and other bodies that are not companies. This automatically rules out a large swathe of employers. It is conceivable that larger companies and multinationals listed on stock exchanges could offer this to new hires on a take-it or leave-it basis, using any existing share incentive schemes.

“Given the potential problems of the scheme and what appears to be a widespread lack of enthusiasm among employers, you may want to question why the government is pushing forward with these proposals? A number of questions remain around the operation of the proposed employee shareholder scheme, and the government has stated that it will address any outstanding issues by issuing clear guidance on the new scheme.

“Until the bill has been finalised and guidance published, the jury will still be out on the true impact that the new status will have on both employers and employees.”

Graeme Nuttall, partner at Field Fisher Waterhouse and author of the Nuttall Review of Employee Ownership, said: “First of all, let’s be absolutely clear that employee shareholder status is not a Nuttall Review recommendation, and it is not seen by the mutual and employee-ownership sector as ‘employee ownership’.

“I have taken a positive approach to employee shareholder status and believe the measure has incidental benefits for employee ownership (as defined in the Nuttall Review). One of the points I made was that the tax reliefs for employee shareholder status, together with increased tax breaks for enterprise management incentives were encouraging signs that the government might yet introduce tax changes to encourage employee ownership.

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“This optimism was well placed. The government has today announced it will introduce a new CGT relief (I would expect this to be a complete exemption from CGT) on qualifying disposals of a controlling interest in a business into an employee-owned structure from April 2014.

“The government will provide £50 million annual funding from 2014-15 to support employee ownership, which will include the cost of this relief. The government has again confirmed its support for employee ownership as envisaged by the Nuttall Review.”