Encouraging employee ownership in the UK

The UK government lead by Nick Clegg and Vince Cable are seeking ways to encourage employee ownership of companies in the UK. However, the current tax regime does not promote this.

As background, the last Conservative Government brought in Capital Gains Tax (CGT) taper relief, to reduce the rate of CGT from 40% down to 10%. At the same time they introduced the Enterprise Management Incentive (EMI) scheme to encourage employee ownership and allow participants to be eligible for the CGT taper relief.

The impact of Entrepreneurs Relief (ER) is to over turn this. To be eligible for ER an individual must own their shares for 1 year prior to sale and own more than 5% of the share capital of the qualifying company.

Not only does the new legislation not reward employee ownership, but worse, it penalises those with EMI share options. Even if these individuals have over 5% of the shares, most are only exercisable at the point of sale. This means that they have not owned the share for more than a year and so they will be taxed at 28%. The current tax legislation penalises employees. It does not reward them!

If the government is serious and wants to encourage employee share ownership the solution is simple - allow all owners of shares in eligible private companies to be rewarded with a 10% CGT rate, irrespective of shareholding or length of ownership.

David Cameron, George Osborne, and Vince Cable, the budget is coming and most of the rules already exist to encourage and reward employee share ownership. So if you really believe in employee share ownership put my suggestion in the budget and reward entrepreneurialism in the UK.