Private equity firms get ‘gift from the taxman’ thanks to Osborne’s employee shareholder scheme

Wealthy private equity firms are planning to use the government's new 'employee shareholder' policy to avoid paying tax on their shares, according to legal experts.

Tax avoidance

Wealthy private equity firms are planning to use the government’s new ’employee shareholder’ policy to avoid paying tax on their shares, according to legal experts.

The policy, intended to encourage employees to take shares in the companies they work for in return for giving up certain employment rights, has even been referred to as “a nice gift from the taxman” by the head of one firm.

The scheme was originally aimed at small and medium businesses and start-ups, but lawyers are reporting increasing interest from private equity firms. Two firms are alledged to be preparing to use the new legislation as a further way to reduce tax bills.

“The whole legislation is a bit of a mess really because it was intended for start-up entrepreneurial businesses, but smaller employers aren’t using it. It’s mostly going to be your private equity and venture capital [using it],” said Helena Derbyshire of counsel at law firm Skadden Arps Slate Meagher & Flom.

And Amanda Onions of Counsel at law firm Hogan Lovells, which is trying to use the scheme for the management of a private equity backed company, said private equity firms “could be saving a significant amount of tax”.

“It seems like quite a nice gift from the taxman, assuming we can get it to work effectively,” she said.

Under the scheme, employees will be offered shares worth between £2,000 and £50,000 that are exempt from capital
gains tax, usually set at 28 per cent.

On most private equity deals, portfolio company managers are able to purchase shares in the company that are valued at a discount.

According to lawyers, management teams that want to use this scheme can value their shares or their incentive equity at a large discount, so falling under the scheme and avoiding capital gains tax.

Commenting on the possibility of private equity firms getting a gift from the taxman, the treasury said it would “monitor the use of this new status to ensure it is being used appropriately”.

Leave a Reply