Guide staff through share scheme maturity

With the right information, employees can make the tax rules on share plans work to their advantage when the schemes mature, explains Sarah Coles.

With any share scheme, employers are most likely to focus their efforts and attention on the launch. But the point employees want to know about, arguably the only point they really care about, is maturity,” says Iain Wilson, head of business development at Computershare.

By not explaining to staff at the time of the launch the decisions that are open to them on the maturity of a share plan, employers miss an opportunity to increase staff appreciation of the benefit. And failing to explain the same options when a scheme reaches maturity can leave staff with an unnecessary tax bill.

Employees’ choices depend on the type of share plan they are being invited to join. With sharesave, members can just take the money, buy the shares and sell them for an immediate profit; buy them and sell some of them; buy and hold; or buy and transfer them into another vehicle. With share incentive plans (Sips), once the shares have been held for the required period, employees can sell, part-sell, transfer or hang on to them.

To help employees make the right choices, employers need to explain what is involved. If staff choose to hang on to the shares, they need to appreciate that they could lose money or be over-exposed to the performance of one company. Sue Bartlett, senior executive pay consultant at Watson Wyatt, says: “There is a great danger in holding a single asset class if you don’t have a large portfolio.”

Employees should also be informed of the tax situation. A Sip can be entirely tax-free as long as shares are disposed of according to the rules. If they are kept for five years in the plan, employees will not have to pay any income tax or national insurance on them. If they are still held in trust at the time of sale, they are free of capital gains tax (CGT) too. If they are withdrawn from the trust, there will be CGT on the difference between the sale proceeds and the value on withdrawal from the trust. Employees need to appreciate this, to avoid withdrawing from the trust unwittingly.

Tax-free bonus
With sharesave, if employees take the cash, the bonus is completely tax-free. But if they buy and then sell the shares, they have to pay CGT at 18% on any gains above the personal tax-free gains allowance, which is £9,600 for this year. Until 6 April 2007, sharesave profits were taxed as “business assets” at 5% for basic-rate taxpayers and 10% for higher-rate taxpayers. Employers should think about communicating the change in the tax treatment of profits because the new rate could come as a nasty surprise for some employees.

Companies may also want to consider providing employees with some tax planning tips that may help them avoid CGT. In the simplest scenario, employees can sell their shares in tranches, so they don’t make a gain above their annual allowance in any one tax year. If they are married, they can also make use of their partner’s allowance. Julie Richardson, head of employee share ownership at ifs Proshare, explains: “You can transfer some of the shares to a spouse or partner and take advantage of their CGT allowance.”

Other tax-saving moves for employees include transferring shares into an individual savings account (Isa), up to the annual limit of £7,200. There is no CGT to pay on the transfer, and once shares are in an Isa, they can be sold tax-free. Even more profitably, employees can transfer the shares into a self-invested personal pension (Sipp) within 90 days of maturity. Not only is this free of CGT, but it also provides up-front tax relief.

The tax benefits can certainly add up. For example, if an employee buys £1,000 worth of partnership shares through a Sip, the relief from tax and national insurance contributions brings the cost, for a basic-rate taxpayer, down to £690. Even assuming the shares do not rise at all over the next the next five years, when the employee transfers them into a Sipp, they are entitled to 20% tax relief, so the pension gets £1,250, a total increase in value of 81%. For a higher-rate taxpayer, the savings are even more striking. For a final value of £1,250, the net cost is just £240, a 421% increase. Some employers make these transfers easy for staff by providing a group Sipp or an Isa which they can elect to utilise by simply ticking a box.

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Communication is vital given the complex choices, but firms must not go too far and offer advice, says Bartlett. “It is not right for the employer to do anything other than provide information and explain what is possible.”

While employers must be wary of offering advice, it is to everyone’s advantage if the information given sees the employee end up better off, especially when it is at the expense of the taxman rather than the employer EB