As detailed in my previous blog, there are many sensible reasons as to why an individual may accumulate shares in their employer, principally through long-term incentive plans (LTIPs), where shares or share options have been granted, and also through share save schemes.
Depending on the type of scheme (or schemes) you were in there may have been income tax, and/or capital gains tax implications. It is also relevant that the investment risk parameters of owning the shares should be thought of independently of the decision as to whether you accrue them in the first place.
I contend, that most individuals, ignoring any exclusions or covenants placed on them by their employer, should dispose of the shares at the soonest opportunity for the reasons given below.
The primary risks of employer shareholdings
Firstly, a single company shareholding is very high risk. It doesn’t matter whether your employer are a FTSE 100 company, or bigger still (for example listed on US stockmarkets); holding a single company share gives you exposure to risks both with respect to that company, but also other systemic risks that we would not typically recommend for individual investors.
This should not be taken as a no comment as to the fortunes of your employer (or ex-employer, if relevant, particularly for ‘good leavers’), though I do elaborate on this below. From an investment perspective our highest risk portfolios (what we call “10/10” on our scales) may invest 100% into equities, but this equity portfolio is usually quite literally several thousand companies’ shares. Each holding will be a few fractions of a % usually accessed through collective investments, and/or where relevant appropriate indices.
We do not typically recommend individuals hold single-company shares for risk-avoidance and other similar considerations.
Secondly, if you accept that holding a single company share is not appropriate, there’s actually more risk by holding shares in your employer’s company, as by definition, if you are a current employee your future is dependent on the fortune of this company both in terms of the job that you hold, but also now through the investments (shares) you hold. If your employer operates a defined benefit pension, even if you are a deferred member, there is a third risk if they were to fail.
For example; consider Karen, who works for a high street bank. This bank is listed on the FTSE 100 and whilst she is now a deferred member of their defined benefit pension, and this pension is well funded, Karen is now exposed to three risks: if an event (not necessarily insolvency) occurred, Karen could find that:
- The share price rapidly falls, and in the event of insolvency, or nationalisation as happened to some banks in 2008/09, potentially to £0
- Her job could be prejudiced, either because they cut back and decided to make her redundant, or again in the event of insolvency
- Whilst there are numerous protections in place, it is fair to say that the defined benefit pension could be at risk if the company were insolvent (broadly speaking the Pension Protection Fund would cover 90% of the value)
The first risk is one that Karen can mitigate – simply by selling her shares at the earliest legitimate opportunity. It is notable some share schemes actively incentivise this.
For individuals who hold the shares for a very long period of time, a concern might be that there are capital gains tax consequences.
There are several ways this can be mitigated, and for many people the most basic is to share ownership between spouses (or civil partners). Transfers between spouses are not usually subject to capital gains tax so this means an individual can potentially enjoy the benefit of two capital gains tax allowances (more on that below) and/or see the capital gains tax paid by individual who has a lower capital gains tax rate than the original holder.
By straddling two tax years, it may be possible to get an additional two capital gains tax allowances. If we consider simple numbers this means an individual can, along with their spouse, make total gains of just around £50,000 without any capital gains tax at all. Depending on the proximity to the tax year this may or may not be advisable, as I elaborate on below.
Note that this tax-free allowance is of total gain, so to do these calculations it’s important that an individual knows the acquisition price of the shares; note: even if the shares have been given “free” there will should be a value of the acquisition which is not invariably not zero.
Personally, I do not think trying to hold the shares too long and trying to be clever with the share price or tax is unwise, as the tax saved on the gain, even if the rate of 20% can be far less than the movement of the share price on individual days. There is also the real risk that capital gains tax could rise from the historically low rates of 10% (basic rate tax payers) and 20% (higher and above tax payers)
For this reason, it’s also worth thinking about the behavioural reasons why an individual may either wish to retain their shares, or to delay selling them.
Behavioural issues with selling shares
What I see most often is people have a view that they want to “hold on” until such time the shares reach a certain price point.
Whilst understandable from a human perspective this thought process doesn’t actually make much sense. Many people, if you asked the question, “what would you do if you had this money in your bank account?”, would not buy the same shares from their employer. This is an example of a behavioural trope (coming from the world of gambling) referred to as “playing with the house’s money”. The example being that if an individual walks into a casino with £100, immediately wins, say, £1,000, even though they could walk out with that £1,000 many people will see the additional £900 as “free money” and continue gambling until it is lost.
If there was a small person on their shoulder saying “you can leave now with the £1,000”, some people may cash in, even partially, to pocket some of their gains, but not everybody.
Logically, the same is true for company shares and if you would not buy those shares with the same money that you can make available today, then why are you continuing to hold them?
The other behavioural consideration is to hold shares that have fallen in value until they go back to what they were previously worth (again this does not make sense as, if the investment is inappropriate, this money can be moved elsewhere, there’s also no guarantee the shares will go back to what they were worth previously).
The other commonly observed behaviour is simply having a value in mind for example a “round number” of £10 per share.
The final behavioural consideration is where an individual has emotional reasons for keeping the share. I have seen various; thinking fondly of your employer is probably the most benign, but I’ve also seen where an individual has lost a loved one that worked for a previous employer and then held them as they feel it’s what their loved one would’ve wanted, even though the individual shares themselves are not appropriate for the recipient – widows and widowers are good example of where I see this most often.
So in conclusion, ignoring tax considerations, it is rarely in your interests to hold company shares of an employer, or ex-employer, for a significant period. But this it can be sensible to buy (or receive them free exc. tax) them in the first place (see my previous article).
The key is to get out of them at “the right time”. This is not the case of trying to take advantage of market timing (which invariably goes wrong) but considering the tax and other considerations (like restrictive covenants) and disposing of the shares in such a way, such a time to minimise undue investment risk which is the primary point of this piece.
If you do have company shares and a concern about anything detailed above please do get in touch around the financial planning considerations of how these shares might fit into your overall investment and retirement objectives – this being a speciality of mine particularly with those who are granted significant amounts of money, in public or private companies.
