With the Labour party’s ‘super majority’ win, the UK is poised for significant changes in various sectors, including employee share incentives.

Timeline of changes

The first question is when we can expect any changes. There is no time before the likely summer recess on 30 July to pass any legislation. Also, for the next Budget or Autumn Statement, the government needs to obtain the review from the Office for Budget Responsibility. Factoring in the recess Parliament and the party conferences, we don’t expect any changes to be announced and implemented before October.

We therefore don’t expect any changes to be announced and implemented before October.

Labour Party’s manifesto and employee share incentives

The manifesto was silent on specific changes to employee share incentives.

Past Labour governments have introduced the income tax treatment of share options (1960s), a tax-advantaged profit-sharing scheme to encourage companies to distribute shares among employees (1978) and the still popular and tax-advantaged Share Incentive Plans (SIP) and Enterprise Management Incentives (EMI) (2000).

We do know that the manifesto pledged not to raise rates of income tax and National Insurance, but there remains some uncertainty about the rates of capital gains tax.

The main tax advantage given by EMI options, SIPs and similar statutory plans is to treat the gain as capital taxed at 10% or 20%, not income taxed at up to 45% (or 48% in Scotland) plus National Insurance contributions.

With this uncertainty, some employees holding shares will therefore be considering whether to trigger a capital gain at the current known rates.

The Labour party pledge to ‘close the loophole’ of carried interest arrangements in their manifesto, which is the share of profits often made by fund managers on the successful growth of a fund. The proposal was to treat gains as income instead of capital (45%/48% instead of 28%). They said this could raise over £400m in tax. Rachel Reeves, the new Chancellor, did later clarify that they would not tax gains as income if the manager had invested their own funds. It will be interesting to see how this change would work, how much needs to have been invested and whether it will apply to current carried interest or only new investments?

Potential changes under the new government

In Summer 2023, HMRC and the Treasury issued a consultation and a call for evidence on the topics of employee benefit trusts (EBT), employee ownership trusts (EOT) and all employee share plans such as SIPs and Save As You Earn (SAYE) option plans. Although no subsequent action was taken, it is possible that the Treasury has prepared draft legislation. This could potentially include the following changes.

• Limiting tax reliefs on gifts into EBTs: the aim is to stop a corporate EBT from being used like a family trust but with extra tax benefits. This could increase revenue.
• Requiring EOTs to be UK residents and subject to capital gains tax: this could also increase revenue. While most EOTs are onshore, the impact on existing offshore trustees is unclear. Will they need to be brought onshore or will non-resident trustees automatically be deemed as UK tax residents? EBTs are more commonly located offshore, so could bringing non-UK resident EBTs within the scope of UK tax be a potential change for increasing tax revenue?
• Deeming section 431 elections to have been made: this has been a long-term proposal and could be beneficial. These elections keep employment-related shares (ERS) outside the scope of the restricted securities legislation, ensuring that a proportion of share sale proceeds isn’t taxed as employment income instead of a capital gain. If these elections are deemed, it would avoid liabilities for employees who are unaware of the election or unable to complete them within 14 days of acquisition. This simplification could benefit both HMRC as well as the taxpayer.
• Reducing the holding periods for SIP shares from five to three years: this proposal has significant support from companies and advisers, but as a tax benefit, it would cost the Treasury unless it’s calculated to aid productivity.

The unions

The Trades Union Congress (TUC) has expressed its support for employee ownership, subject to specific conditions.

• Equitable allocation: shares should be distributed fairly among all staff, avoiding pay disparities and excluding low-paid workers.
• Complementing decent pay: share awards should not replace fair wages negotiated through pay bargaining. They should complement decent pay rather than substitute it.
• Worker and union involvement: workers and unions should actively participate in the management of share schemes. Their voices matter in shaping policies.

Worker status

Since employment-related securities (ERS) have a special tax regime, the status of a person as an employee, self-employed or a worker can significantly impact tax and National Insurance liabilities. This is a well-known complex area. Labour have proposed creating a single status of ‘worker’ with a proposal to consult on identifying a simpler framework that differentiates between ‘workers’ and the ‘genuinely self-employed’.

Recent case law has brought some investors’ shares within the scope of the ERS legislation, so simplification and clarity would be beneficial. However, this remains a difficult topic, so it seems unlikely this topic will be resolved quickly.

Other employment law changes

Proposals such as banning zero-hours contracts, strengthening redundancy rights and protections under the Transfer of Undertakings (Protection of Employment) regulations (TUPE), and increasing the National Minimum Wage could impact the interpretation of existing share option or incentive plans. So, be sure to check back with RSM whenever there are new announcements.

If you would like any more information on employee share incentives, please contact Fiona Bell, Martin Cooper, or your usual RSM contact.