ESS was an arrangement under which employees entered into agreements to vary their employment rights in consideration for the receipt of shares, and the first £50k worth of those shares would fall within a specific tax regime. Originally any shares received in this way would benefit from an unlimited capital gains tax exemption on disposal but this benefit has been whittled away over time. For ESS agreements entered into on or after 16 March 2016 but before 1 December 2016, there was a lifetime limit of £100,000 capital gains tax exempt gains on the disposal of ESS shares. For agreements entered into on or after 1 December 2016, there is no longer a capital gains tax exemption available on the eventual disposal of the ESS shares and those shares will be subject to capital gains tax in the same way as if the shares had not been acquired under ESS.
Although ESS benefits have come to an end there are still quite a few lucky holders of pre 16 March 2016 ESS shares who will be expecting to sell their shares tax-free. Although usually this can take place without any problem, care should be taken when a company purchases ESS shares from employees in connection with them leaving the company.
The default position of a company purchase of own shares (CPOS) is that any proceeds over the original subscription price are taxable as a dividend (at current rates of up to 38.1%). There are special cases where capital treatment can apply but this has various conditions attached, one such condition being that the shareholder should have held the shares for 5 years – which will not be met for current holders of ESS shares.
Fortunately when the ESS rules were introduced in the 2013 Finance Act a special provision was inserted which in certain circumstances prevents an ESS shareholder from being taxed on a dividend when there is a CPOS (irrespective of whether the capital conditions are met). These rules say that no income tax would be payable in respect of an ESS CPOS provided that at the time of the disposal the individual is not an employee of, or an office-holder in, the employer company or an associated company of that company.
When employer companies purchase ESS shares they should make sure that this takes place after the shareholder has formally resigned from all duties and is no longer an officer or employee. Great care should be taken here as (at least technically) a simple failure to remove the shareholder as a director (or secretary!) of a minor subsidiary could have a calamitous impact on his tax position. It could be the difference between a 0% tax bill and a 38.1% tax bill!
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