Employee share schemes can be a powerful way to attract, retain and reward key people.
When structured well, they align employees with the long-term success of the business and create a shared interest in growth.
But there is one problem many business owners don't think about until it's too late: What happens when an employee leaves?
This can seem like a distant concern and this is why often the focus is usually on granting shares, agreeing vesting terms and creating incentives that encourage long-term commitment.
The exit is often treated as a problem for another day. Yet this is precisely where many of the biggest challenges emerge.
A shareholding that was worth £20,000 when it was granted may be worth £500,000 several years later. The employee is leaving, the business has grown, and suddenly a series of important questions need answering.
If those questions have not already been addressed, what should be a straightforward shareholder exit can quickly become a source of dispute, delay and unexpected tax consequences.
Recent professional guidance on employee shareholder exits highlights an important lesson for business owners: the success of a share scheme is not judged when employees join it. It is judged when they leave.
The businesses that manage exits successfully are rarely the ones that react well when an employee resigns.
They are the ones that planned for that possibility years earlier.
Here I explore the key questions every business owner should consider before introducing an employee share scheme and why answering them early can help protect value, reduce risk and avoid costly surprises later on.
1. What happens when an employee leaves?
This may sound obvious, but many businesses do not have a clear answer.
When an employee departs, should they continue to hold shares in the company? Should they remain entitled to future growth? Should they continue receiving shareholder information?
For some businesses, particularly larger organisations, continued ownership may not create significant issues.
For many privately owned businesses, however, the answer is different.Owners often want departing employees to give up their shares because they are no longer contributing to future growth, or because retaining shareholder rights may create governance and confidentiality concerns.
This is why many share schemes include "good leaver" and "bad leaver" provisions. The specific rules matter less than having them clearly documented before they are needed. Trying to negotiate exit terms after an employee has already decided to leave rarely ends well.
2. Who buys the shares?
Once a decision has been made that the employee should exit, the next question is who acquires the shares. There are several possibilities.
Each route has different commercial implications.
3. How will the shares be valued?
This is often where shareholder disputes begin. The departing employee naturally wants to maximise value. The remaining shareholders want a fair outcome that protects the business. Without an agreed valuation methodology, disagreements can become expensive and time-consuming.
Businesses should consider how to value the shares at the outset, rather than relying on future negotiations.
Questions to consider include:
This prevents conflict later.
4. Will the proceeds be taxed as income or capital?
This can often be one of the most misunderstood areas of employee share ownership. Many people assume that because shares are involved, any proceeds received on exit will automatically be taxed under Capital Gains Tax (CGT) rules. In practice, it is not always that straightforward. Employment-related securities rules can apply in certain circumstances and may result in part of the proceeds being treated as employment income rather than capital. The tax outcome can depend on how the shares were acquired, how they are valued and how the exit is structured.
But, you don’t need to be a tax expert. You just need to understand that the structure chosen for an employee exit can materially affect the tax outcome.
5. Will HMRC agree?
Even where a structure appears commercially reasonable, businesses must consider how HMRC may view the arrangement.
Recent discussions suggests HMRC is taking an increasingly robust approach to certain employee shareholder exits, particularly where businesses are seeking capital treatment rather than income treatment.
This does not mean businesses should avoid legitimate planning. But, it does mean that you should ensure there is genuine commercial rationale behind the chosen structure and that supporting documentation is robust.
Areas that may require particular attention include:
The stronger the documentation and commercial rationale, the easier it becomes to support the intended outcome.
The conclusion
The biggest mistake businesses make is not necessarily choosing the wrong exit route. It is waiting until somebody leaves before thinking about it. By that point, the shares have value, emotions are involved and tax consequences become real.
The most successful employee share schemes are not designed solely around the acquisition. They are designed around how employees leave them also.
Businesses that address exit arrangements early tend to experience fewer disputes, more certainly and more predictable tax outcomes.
My advice
If your business operates an employee share scheme, or is considering introducing one, now may be a good time to review:
Employee share schemes remain a great tool to align employees with long-term business success. But, issuing shares is only half of the story. The other part, and often the testing part, comes years later when an employee leaves. By answering the right questions early, you can protect value, reduce uncertainty and create a framework that works for both your business and your shareholders.
If you would like to discuss employee share schemes, shareholder exits, tax planning or broader business structuring considerations, Moray Multum Advisory can help you explore the options available and understand the implications before important decisions need to be made.
Based on insights from "Employee Shareholder Exits: Capital or Income?" (22 April 2026), with additional analysis and commentary from Moray Multum Advisory.