REV 3
7 March 2001
TAX BOOST TO EMPLOYEE SHARE OWNERSHIP
The amount of share options that small, growing companies will be able to grant under Enterprise Management Incentives (EMI) is to be doubled to £3 million, the Chancellor announced today. And, to make EMI easier for companies to operate, the limit on the number of employees in each company who can hold options will be removed.
These measures, building on changes proposed in the Pre-Budget Report, will provide a welcome boost for small companies to help them attract and retain the highly skilled staff they need to grow.
Larger companies too will benefit from the other changes:
- improvements are to be made to the new All-Employee Share Ownership Plan (AESOP), which has been widely welcomed by companies as a way of ensuring all employees have an interest in their company's success. A number of detailed changes will make the plan easier for companies to administer. One that will be particularly welcomed is a new exemption from stamp duty when employees buy shares from an AESOP trust;
- the generous capital gains tax taper relief treatment of business assets will be extended to employees of non-trading companies so long as they do not have a material interest of more than 10 per cent in the company; and
- the Social Security Contributions (Shares Options) Bill, currently going through Parliament, will allow companies to settle unpredictable national insurance liabilities on the growth in value of employee share options that were granted between 6 April 1999 and 19 May 2000. They will be able to do this by making a special employer contribution based on the value of their shares on 7 November 2000.
The Financial Secretary to the Treasury, Stephen Timms, said:
?Employee share ownership is increasingly being recognised as a major driver of improved productivity. Last year we introduced significant tax incentives to promote employee shareholdings. This included EMI and the new All-Employee Share Ownership Plan. These have been welcomed by business. We have listened to their suggestions to improve the measures and make them easier for companies to operate. The new features that the Chancellor has announced will help companies to extend employee share ownership even further. They will support the Government's productivity drive by increasing employees' commitment to the success and growth of the companies they work for.?
DETAILS
Enterprise Management Incentives
Share options are important for small companies who need to attract larger numbers of the highly skilled workers to help them grow and achieve their full potential.
At present, 15 key employees in small higher-risk companies can each be granted options over shares worth up to £100,000. So companies are allowed to grant EMI options over a maximum of £1.5 million of their shares at any one time. Under the changes announced today companies will be able to grant options over a maximum of £3 million worth of shares at any one time.
The Government is keen for smaller enterprises to be able to use EMI in the way that will best meet their business needs. During consultation, employers said that the limit of 15 employees is not flexible enough. The Government agrees with this and will remove this limit.
As a result of the consultation, the following changes will also be made:
- extending the time limit for notification of the grant of EMI options from 30 days to 92 days;
- removing the requirement for prior approval for alteration to share capital; and
- offering advance assurance on whether or not a company qualifies.
All-Employee Share Ownership Plan
New enhancements will simplify the operation of All-Employee Share Ownership Plans (AESOPs) and ensure that stamp duty is not paid twice when firms grant shares to their employees. As AESOPs are run through a trust, there can be a stamp duty charge both when the trust buys shares and when these shares are subsequently bought by the employees. The changes announced today will remove the stamp duty charge when employees buy shares from an AESOP trust.
The Government will also remove the possibility of employees facing an income tax charge when an employer or trust meets the stamp duty liability. The possibility of employees facing an income tax charge when an employer or trust meets incidental costs of operating the plan will also be removed.
Another change will make the scheme both fairer and easier for groups of companies to use. Currently some people who have been employed by the group are excluded from participating in a plan, because they have moved around within the group. The changes announced today mean that an employee will satisfy a qualifying period of employment for AESOPs by having worked throughout that period in any company that was part of the group.
These measures will make the administration of the AESOP simpler and help reduce compliance costs.
Capital gains tax (CGT) taper relief
The extension of the more generous business assets taper relief for capital gains tax to employees of non-trading companies will simplify the tax system and reduce compliance costs. Employee shareholders, including those working part-time, will no longer always have to consider whether the company where they work is trading. As a result, many companies, in particular listed companies, will no longer have to address this question on behalf of their employees. This change will apply from 6 April 2000, thus coinciding with the changes announced in Budget 2000.
Following the Pre-Budget Report announcement, the Government consulted on the revenue protection needed to prevent abuse. The Government has decided that an officer or employee will only be eligible for business assets taper relief on shares in a non-trading company if he or she does not have a material interest in the company. An example of a material interest is holding more than 10 per cent of the voting rights in the company.
National Insurance on Share Options
Legislation has been introduced in the Social Security Contributions (Share Options) Bill to limit the amount of the NIC payable on options granted to employees between 6 April 1999 and 19 May 2000. The employer will be able to limit the liability to the gain attributable to the growth in company share price up to 7 November 2000.
This will allow companies to settle unpredictable national insurance liabilities on the growth in value of employee share options.
NOTES FOR EDITORS
Enterprise Management Incentives
Enterprise Management Incentives (EMIs) were introduced in Finance Act 2000 after a successful period of consultation. The incentives are proving to be popular. The Inland Revenue has been notified that more than 480 companies have awarded EMI options to over 2600 employees up to the end of February.
EMI share options can be granted by trading companies, quoted or unquoted, with gross assets of no more than £15m. This size limit is the same as for tax incentives aimed at encouraging equity investment in small, higher-risk unquoted trading companies - the Enterprise Investment Scheme, Venture Capital Trusts, and the Corporate Venturing Scheme.
Currently under EMI, companies can grant up to £100,000 worth of share options to each of 15 key employees, effectively limiting the total value to £1.5 million per company. The options are normally free of Income Tax and National Insurance charges on grant and on exercise. When the shares are sold, capital gains tax taper relief normally starts from the date the options were granted.
The consultation period for the changes announced today ran from 8 November to 13 December 2000.
Further information on other changes to EMI is available in a separate Inland Revenue Budget Note, REV BN 6, ?More Flexibility for Enterprise Management Incentives?
Capital gains tax taper relief
Capital gains tax (CGT) taper relief was introduced in the Finance Act 1998. The relief reduces the amount of a capital gain that is charged to tax on the disposal of an asset; the reduction increases the longer the asset has been held after 5 April 1998. Taper relief applies to the capital gains of individuals, trusts and the personal representatives of deceased persons, but not to the capital gains of companies.
Different tapers apply to business assets and non-business assets. The taper reduces the effective CGT rates for a higher rate CGT payer from 40 per cent to 10 per cent for business assets and from 40 per cent to 24 per cent for non-business assets.
The Finance Act 2000 broadened the range of assets that qualify as business assets with effect from 6 April 2000. That act extended business assets to include:
- shares owned by employees and officers in a trading company where they work;
- shares in unlisted trading companies; and
- shares in listed trading companies provided that the individual controls not less than 5 per cent of the voting rights.
The November 2000 Pre-Budget Report announced the Government's intention to extend the definition of business assets to include employee shareholdings in non-trading companies, subject to consultation on the appropriate degree of revenue protection. Most businesses are treated as trading, but investment companies and property investment companies are not. Companies that are mainly trading, but that have more than an insubstantial amount of non-trading activities are also not treated as trading.
Further information on the changes to CGT taper relief is available in a separate Inland Revenue Budget Note, REV BN 4, ?Capital Gains Tax Business Assets Taper Relief?.
All-Employee Share Ownership Plan
The All-Employee Share Ownership Plan (AESOP) was introduced in Finance Act 2000 after extensive consultation. AESOPs have been well received. Companies have been going live with their plans from as early as September last year. Over 280 companies have sent in plans to the Inland Revenue for approval. So far 187 plans are ready to be implemented.
Changes announced today will ease the operation of AESOPs, particularly for smaller companies where this can be a greater burden.
National Insurance Contributions
Since 6 April 1999 National Insurance has been payable by both employer and employee on the gains arising when share options are exercised outside an Inland Revenue approved scheme and where the shares are readily convertible into cash.
Companies with very volatile share prices expressed concern that their exposure to an unpredictable NICs liability on unapproved share options could endanger their investment strategies and damage their future growth by deterring investors. Legislation was introduced on 28 July 2000 in the Child Support, Pensions and Social Security Act 2000 to allow the employee to bear the employer's NIC on share option gains. And changes in Finance Act 2000 gave employees tax relief for any of the employer's NICs that they paid against the taxable gain on the share option.
The new legislation in the Social Security Contributions (Share Options) Bill will limit the amount of the NIC payable on options granted between 6 April 1999 and 19 May 2000. The liability will be limited to the gain attributable to the growth in company share price up to 7 November 2000. It will come into effect when the Bill receives Royal Assent.
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