We’ve been back in St Ann’s Square for just a year now, and this is the 4th Issue of the Square Circular.
This issue concentrates on share options and employee incentives. The plethora of incentives and schemes over the years can make this topic seem something of a “jumble”. However with the Labour government now firmly entrenched in a second term of office it looks likely – and indeed they have already indicated – that the schemes to incentivise employees which they started in their first term of office will be further promoted and developed.
It is also often the case that a Government becomes much more radical in its second term of office than it was during the first term. Whilst we wouldn’t dare to predict what may happen over the next four or five years this issue of the Square Circular does also contain a timely reminder not to forget your inheritance tax planning.
SO, WHAT ARE THE OPTIONS
Do you get confused and decide not to focus when the subject under discussion is that of share option schemes. The abbreviations which soon take on the hallowed status of jargon probably don’t help much, either. However it is an area which should not be ignored by a growing company.
Giving valuable shares and share options to managers and employees can be a powerful incentive and motivator. For the company it often means greater commitment on the part of its staff who are likely to identify more closely with the company’s success. As regards the employee the granting of options by a rapidly growing company could eventually provide him/her with massive benefits well in excess of annual salary.
In the past family companies rarely issued shares to employees other than to attract and “lock in” the employees. There may be very practical reasons for this reluctance. For a start, from an employee’s point of view shares may not be perceived as much of an incentive if they can not be readily turned into cash. Undoubtedly there have also been tax disincentives in the form of a possible Schedule E income tax charge arising on the award of free or cheap shares, or on the exercise of a share option at a market value greater than the amount paid to acquire them, or on an increase in the value of the shares caused by varying any restriction attached to them. What’s more, the tax is based on benefits which have not yet been realised in the form of cash.
How is the employee to finance his tax liability? Throw in some National Insurance Contributions (not really a tax, is it?) and you can readily appreciate why the idea of employee share participation in employer companies has never been a best seller.
Over the years successive governments have eased these problems by devising various “approved” share option schemes, share incentive schemes, profit sharing schemes etc. for executives and employees. As you may suspect these schemes have not always been wholehearted in that the desire to incentivise has been restrained by the desire to avoid a tax “give away”. This only leads to more alternatives and more complications.
As is often the case the most recent inventions are the most popular. After all, they are most suited to the immediate hour. Last year, the Labour government in its first term of office, not to be outdone in this sphere of tax legislation gave us AESOPs (sorry – All Employee Share Ownership Plans) and EMIs (sorry – Enterprise Management Incentives).
This is not the place to go into the glorious intricacies of these schemes. Suffice to say, they are designed to meet different needs. AESOPs, as the name would suggest, are designed to be open to all employees and can be particularly appropriate to a company which envisages sale or flotation within a few years at which point the benefits could be reaped by a wide range of employees. On the other hand EMI is directed towards providing greater rewards but to targeted employees. The main tax benefits of EMIs are:-
• there will normally be no income tax or National Insurance contributions when the options are exercised
• when the shares are sold Capital Gains Tax taper relief will normally start from the date the options are granted.
• the company should receive corporation tax relief on the cost of setting up EMI.
Of course, substantial work is involved in setting up an EMI scheme and the costs of doing so are not cheap. Option agreements, shareholders agreements, letters to H M Inspector of Taxes and Shares Valuation and other documentation will be involved. Will the costs be justified by the rewards? A recent article in The Times mentioned that 1000 companies have already set up share option schemes under the EMI initiative and suggested that there could be 6000 further companies which would be attracted to the scheme as the present Government continues to look for ways of adding further attractions to the existing scheme.
If you want further information please contact either Simon Topperman or your usual contact partner at our office on 0161 832 4841.
It could be one of the most talked about and potentially valuable tax incentives for years.
IN A STATE ABOUT ESTATES?
Our article in last time’s Issue about tax efficient wills seems to have attracted the interest of quite a few people. We make no apologies about coming back to Inheritance Tax so soon for the benefit of those who like to take their time thinking about things.
You see, the Government also likes to take time thinking about things. Before 1997 the Labour Party was quite critical of the ineffectiveness of the inheritance tax regime. We thought that, if and when elected, a Labour government would soon turn their attention to matters such as deeds of variation, potentially exempt transfers, business property relief, gift with reservation rules and the like. Yet, each year, we’ve been disappointed – if that’s the right word – at nothing happening.
Perhaps the new Government, more assertive in its second term of office, may be tempted to start “doing” rather than “thinking”. Over the next couple of years the inheritance tax regime could:
a) become more relaxed or
b) stay the same or
c) become stricter.
Your prediction as to the most likely of these alternatives will dictate the urgency with which you contact us for tax planning advice.