Capital Gains Tax on Employee Shareholder Shares

Introduction

If you hold Employee Shareholder shares acquired under the Employee Shareholder Status scheme, you may benefit from special Capital Gains Tax (CGT) treatment that can significantly reduce your tax bill when you sell them. Although this scheme closed to new participants in December 2016, existing Employee Shareholders retain valuable CGT exemptions on the first £50,000 worth of gains on their shares, as well as potential enhanced relief when Business Asset Disposal Relief (formerly Entrepreneurs' Relief) applies.

What is Employee Shareholder Status?

Employee Shareholder Status was introduced in September 2013 and closed to new participants on 1 December 2016. Under this arrangement, employees gave up certain employment rights in exchange for shares in their employer's company. These shares came with special tax advantages, particularly for Capital Gains Tax purposes.

If you became an Employee Shareholder whilst the scheme was open, the favourable CGT treatment continues to apply to those shares even though no new Employee Shareholders can be created.

The £50,000 CGT Exemption

The most significant benefit for Employee Shareholder shares is a lifetime CGT exemption on the first £50,000 of gains. This exemption applies to gains arising on the disposal of shares acquired under Employee Shareholder agreements.

This means that when you sell your Employee Shareholder shares, the first £50,000 of profit is completely free from CGT. This exemption is in addition to your annual CGT allowance (the annual exempt amount, which is £3,000 for 2025/26).

The £50,000 limit is a lifetime limit that applies across all Employee Shareholder shares you hold, not a per-employment or per-transaction limit. Once you have used this exemption, any further gains on Employee Shareholder shares will be subject to normal CGT rules.

How the Exemption Works

When you dispose of Employee Shareholder shares, you calculate your gain in the normal way – broadly, the sale proceeds minus the acquisition cost and any allowable expenses.

The £50,000 exemption is then deducted from this gain before any other reliefs are considered. If your gain is less than £50,000 (or less than your remaining exemption if you have already used part of it), the entire gain is exempt from CGT.

If your gain exceeds the £50,000 exemption, the excess is a chargeable gain that may qualify for other CGT reliefs or will be taxed at the applicable CGT rates.

Interaction with Business Asset Disposal Relief

Business Asset Disposal Relief (BADR), previously known as Entrepreneurs' Relief, allows qualifying individuals to pay CGT at 10% on the first £1 million of lifetime gains from disposing of qualifying business assets, including certain company shares.

Employee Shareholder shares can qualify for BADR if the normal conditions are met. The interaction between the £50,000 Employee Shareholder exemption and BADR is particularly advantageous.

The £50,000 exemption is applied first, reducing your chargeable gain. If the remaining gain qualifies for BADR, you pay 10% CGT on that remaining gain, and this counts towards your £1 million BADR lifetime limit.

Crucially, because the £50,000 exemption is applied before BADR, it does not use up any of your £1 million BADR lifetime allowance. This means you effectively get the benefit of both reliefs.

Valuation and Acquisition Requirements

For shares to qualify for the special CGT treatment, they must have been acquired under a valid Employee Shareholder agreement. The shares must have been worth at least £2,000 at the time they were acquired by the employee.

This minimum value requirement ensures that only genuine Employee Shareholder arrangements benefit from the favourable CGT treatment.

Reporting Your Disposal

When you sell Employee Shareholder shares, you must report the disposal to HMRC if the total proceeds exceed £50,000, or if you have a tax liability to pay after taking into account all reliefs and your annual exempt amount.

You report the disposal through Self Assessment, completing the Capital Gains Tax summary pages. You should clearly identify that the shares are Employee Shareholder shares and claim the £50,000 exemption where applicable.

Even if you have no CGT to pay due to the exemption, you may still need to report the disposal if your proceeds exceed the reporting thresholds.

Shares Acquired After December 2016

It is important to note that Employee Shareholder Status was closed to new participants from 1 December 2016. Shares acquired under Employee Shareholder agreements entered into on or after this date do not qualify for the £50,000 CGT exemption or the other special CGT reliefs.

If you hold shares that you believe were acquired under an Employee Shareholder agreement, check the date of your agreement to confirm whether the special CGT treatment applies.

Record Keeping

You should maintain detailed records of your Employee Shareholder shares, including:

• The date you acquired the shares and entered into the Employee Shareholder agreement
• The market value of the shares when you acquired them
• Any amount you paid for the shares
• Documentation of your Employee Shareholder agreement
• Records of any disposals and the gains or losses made

Good record keeping will help you claim the correct reliefs and exemptions when you eventually dispose of the shares.

Sources

• Guidance on the Capital Gains Tax treatment of Employee Shareholder shares

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.