Companies with employees in the UK will need to consider a number of tax changes proposed under the draft Finance Bill 2013, which has just been published. A number of very exciting changes will make it much more attractive to offer employee share plan participation in the UK.
The following changes will be made:
- Certain companies will be able to grant share options subject to an effective 10 percent tax rate
- UK-approved share plans will be simplified and available to many more companies
- Employees will be able to waive certain employment law rights in exchange for tax relief for new shares
A potential 10 percent tax rate for employees of smaller companies In the UK, capital gains are subject to capital gains tax (CGT) at rates that depend on the employee’s marginal income tax rates (18 percent or 28 percent). Currently, employee shareholders who hold at least 5 percent of the capital of the company for at least 12 months may be entitled to Entrepreneurs’ Relief, such that the effective CGT rate is only 10 percent.
Usually, because of the 5 percent requirement, Entrepreneurs’ Relief is only really available to senior employees. The new legislation will extend Entrepreneurs’ Relief to employees acquiring shares on the exercise of EMI options even if they do not hold 5 percent of the company’s shares. Further, the 12-month holding period will run from grant of the EMI option and not exercise.
The relief extension will apply to eligible shares acquired on or after 6 April 2012, and disposed of on or after 6 April 2013.
Opportunity – This is a huge opportunity for employers that qualify under the EMI regime. EMI options are already extremely tax effective, but now they are essential where companies are seeking to allow employees to acquire shares. Employees with existing EMI options may wish to postpone any sale of their shares until after 6 April 2013 to take advantage of the extended relief.
Companies should consider anew whether to implement UK-approved share plans. Approved option plans are often considerably cheaper than other share plan arrangements since gains made by employees are normally free of income tax and National Insurance Contributions (NICs), and instead are only subject to CGT at lower rates.
Simplification of UK-approved share plans The Finance Bill 2013 makes a number of improvements to UK-approved share plans:
- Many more companies will be able to use their shares for approved share plans from 6 April 2013. This includes Company Share Option Plans (CSOPs), Save-As-You- Earn Plans (SAYE) and Share Incentive Plans (SIPs). Companies with restrictions on their shares (i.e. most private companies) used to struggle to get approval because of legislative requirements as to the shares that could be used. Now, companies will be able to use almost any shares for their approved plans. This means that many more companies will qualify for approved plans.
- Employees with "material interests" in company shares (25 percent) may now participate in SAYE and SIPs, although the material interest threshold will still apply to CSOPs (at a higher percentage of 30 percent).
- Certain good-leaver provisions will be harmonised and extended. In particular, options will be able to be exercised free of income tax and NICs within six months following a change of control or transfer of business. This will be good news for employees who might otherwise lose the tax relief because their employer company/business has been sold.
- EMI options may be exercised for a period of 90 days rather than the current 40 days following a disqualifying event (such as a change of control to a corporate buyer or termination of employment).
New Employee Shareholder CGT exemption The Finance Bill 2013 will include new relief for shares subscribed by an employee on or after 6 April 2013 if he or she agrees to adopt the proposed new "employee shareholder" status and lose some employment law protection, such as certain rights to claim unfair dismissal. The first £2,000 worth of shares are expected to be free of income tax and NICs, and there will be a full CGT exemption for up to £50,000 worth of shares.