Capital gains tax (CGT) is currently charged at a flat rate of 18 per cent. The current top rate of income tax is 40 per cent. From April 2010 a new rate of income tax of 50 per cent will apply to income over £150,000. Also, from April 2010 the income tax personal allowance will be reduced for those with incomes over £100,000, tapering down to zero. For employers and employees national insurance contributions are also due too. It is thus now more imperative to consider tax planning involving CGT wherever possible.

Although EMI share option schemes enjoy favourable tax treatment in that CGT treatment is given, there are a number of conditions required to qualify for these schemes. There are numerous types of unapproved or fully taxable share incentive schemes and although these schemes provide share incentives they do not attract favourable tax treatment save for the HMRC approved schemes but these are limited in application and value.

The Joint Ownership Plan

The Joint Ownership Plan (‘JOP’) enables a company to incentivise, retain and reward employees with the benefit that the gain should be subject to CGT rather than income tax.

How does the JOP work?

The executive and a third party (for example an employee trust) acquire for example 1000 shares which the executive and the third party own jointly.

The terms on which the ownership of these 1000 shares are held is that the third party is entitled to virtually all the current value of the shares at the date they are acquired, apart from a small fraction of that value which belongs to the executive. The executive pays a small sum for that fractional entitlement and the third party pays the balance.

The executive is then entitled to a proportion of the future growth in the value of the shares. The executive's entitlement, for example, can be made subject to performance targets being met over a period of years. The third party is also entitled to a proportion of the future growth in value.

After a certain period of time and provided certain conditions, normally performance criteria, are met the shares can be sold and the executive will receive the executive’s share of the proceeds of sale with the third party receiving its share of the sale proceeds. This will be the amount by which the shares have increased in value since their acquisition and should be subject to CGT.

Conclusion

The benefits of the JOP include its favourable tax treatment and flexibility as compared to unapproved share schemes and EMI share option schemes.

No special class of shares are required for a JOP and it may be adopted by both listed and unlisted companies.

For companies wanting to offer their executives the opportunity to share in any growth in share value and be subjected to CGT at 18% rather than income tax at 40% the JOP is a straightforward and cost-effective way of achieving this.