Government issues draft legislation on new share scheme

FINANCIAL PARTICIPATION


Government issues draft legislation on new share scheme

The Government has unveiled draft legislation for a new style all-employee share scheme, which it boasts is the most tax-advantaged share plan for all employees ever introduced in the UK .

This measure will, for the first time, allow staff to allocate part of their pre-tax salary to buy shares in their own company without paying income tax or national insurance contributions. Employers will have much more flexibility in the way they provide matching free shares, with the option of linking share awards to performance.

This reform is designed to create both a high-investment economy and a wealth-owning democracy open to all, said the Chancellor of the Exchequer Gordon Brown.

The plans are part of New Labour’ s commitment to boost productivity, advance the stakeholding society and promote a US-style enterprise culture in which everyone contributes and everyone benefits from success . The underyling thinking is simple: giving staff a direct interest in the financial performance of the company in which they work raises employee involvement, creates a sense of responsibility and generates greater workforce commitment. What’ s more, Mr Brown suggests that the scheme could help keep the lid on inflationary wage demands.

Under the plans, employee will be able to receive shares worth up to £ 7,500 each year for a cash outlay of just £ 1,500. But just how many employers will be this generous remains to be seen. Nevertheless, in all, someone receiving this maximium amount could enjoy a tax saving of as much as £ 3,000.

More and more organisations have discovered that share plans can be a tax-effective way of increasing employee involvement in the business while at the same time giving staff a direct stake in their own company. Today some 1,750 companies offer shares to all their employees and around two million employees participate in existing Inland Revenue-approved schemes. Last year the Chancellor announced that he wished to double the number of companies in which all employees have the opportunity to own shares.

Sally Russell, head of employee share ownership at Proshare, praised the plan: The Government wants to encourage those companies who have not yet embraced employee share ownership to set up a plan for their workforce. The new all-employee share plan will be an important step towards this.

The end for SAYE?

But will this new initiative signal the demise of the present tax-favoured arrangements? An announcement on the fate of the three existing employee share plans is expected at the end of the consultation period on the draft legislation.

A number of tax experts suspect that the new initiative signals the end for some, or all, of these share schemes.

While Ministers have not yet made any decision about the existing schemes, including SAYE, it is important to note that they have said they want to extend employee share ownership, said Russell. The SAYE Scheme is a proven, effective mechanism for achieving this goal. If SAYE stays it is likely that some changes will be made to existing legislation to differentiate between those who use the scheme to become shareholders and those who use it merely as a tax-efficient savings scheme.

Comments on the draft legislation should be submitted by 28 January 2000 to Richard Lambert, Room 138, New Wing, Somerset House, Strand, London WC2R 1LB.

Or email: Richard.V.Lambert@ir.gsi.gov.uk

How will it work?

Legislation for the new-style share scheme will be introduced in the Finance Act 2000. Put simply, the new plan has three main parts:

  • Free shares: a company can hand out up to £ 3,000 of shares to employees free of tax and NICs. Employers will have much more flexibility in the way they provide these free shares, and will be able to grant shares linked to individual, team or divisional performance. These shares can be taken away if the employee leaves the company within three years of receiving the shares.

  • Partnership shares: employees will be able to buy up to £ 1,500 of shares out of their pre-tax salary — that means a basic-rate taxpayer will pay only £ 78 for £ 100 worth of shares.

  • Matching shares: the company will be able (but not obliged) to award another allocation of up to two free shares for each partnership share the employee buys. These shares, too, can be taken away if the employee leaves within three years.


What about the tax treatment?

The tax breaks appear fairly generous:

  • Income tax: all shares held in a plan are free of tax or NICs provided that they are held for five years. Employee who take their shares out of a plan after three years will pay income tax and NICs only on the invested amount — any increase in the value of shares while in the plan are free on income tax and NICs.

    If the shares are taken out within three years of the award, employees will have to pay income tax on the market value of the shares on removal.

  • Capital gains tax: all gains accruing while shares are in the plan are exempt from capital gains tax. Employees who sell their shares will be liable to CGT only on any increase in the value of their shares after they come out of the plan.

  • Dividends: dividends paid on shares will be tax free, up to annual limits, if used to buy more plan shares.

Web links

  • The Inland Revenue has issued draft legislation and a commentary. Copies of the 82-page report can be downloaded in portable document format (PDF) from the Inland Revenue’ s web site:
    www.inlandrevenue.gov.uk/shareschemes

  • A press release summarising the main details of the new all-employee share scheme is also available from the Inland Revenue:
    www.inlandrevenue.gov.uk/pbr/ir5.htm

  • Further details of the new seminar on employee share schemes, devised by e-reward.co.uk, are one click away at the Hawksmere web site:
    http://www.hawksmere.co.uk/auto/events/11057.html

  • Proshare has set up a focus group consisting of about 60 representatives and service providers. This group is working closely with the Revenue on the new plans. For more information visit the Proshare web site:
    http://www.proshare.org.uk