Continuing my business-ori- ented review of the Budget, it is important
for any IFA giving advice on employee benefits to be aware of the new all-
employee share ownership plan (Aesop).
The plan is aimed at encouraging companies to foster a more productive
relationship with their employees.
The Government claims the new plan will be the most tax-advantaged
all-employee share ownership plan ever introduced in the UK and will
provide greater flexibility than any of the current schemes to meet the
needs of companies and employees.
It is proposed that shares held in the plan for five years will be free of
income tax and National Insurance. The details of the plan are as follows:
Employers can give up to £3,000 worth of shares to employees free of
income tax and National Insurance to reward them for reaching their
personal, team or divisional performance targets.
Employees will be able to buy shares out of their pre-tax and pre-NICs
salary up to a maximum of 10 per cent of salary or £125 a month.
Employers can match partnership shares by giving employees up to two free
shares for each partnership share they buy.
More generally, employees who sell their shares will be liable to capital
gains tax only on any increase in the value of their shares after they are
removed from a plan.
Shares must normally be kept in the plan for at least five years to avoid
an income tax charge.
Employees who take their shares out of a plan after three years and before
the end of five years will pay income tax and NICs on no more than the
initial value of the shares. Any increase in the value of their shares
while in the plan will be free of income tax and NICs.
Employees who take their shares out of the plan within three years will
pay income tax and NICs on the market value of the shares at the time of
Shares must be removed from the plan when employees leave the company.
Some employees may lose their free and matching shares if they leave their
job within three years of getting the shares.
Dividends paid on the shares will be free of tax up to £1,500 a year
provided they are used to acquire additional shares in the company.
Employers will get a deduction in computing their taxable profits for the
costs of setting up and running the plan and for the market value of any
free and matching shares held in the plan.
There are those who have commented that, given the tax rules, Aesops may
well look more attractive than approved pension schemes for employees. From
a tax and accessibility standpoint, it is hard to disagree with this
conclusion – at least up to the limits permitted within the Aesop.
But what of the investment fundamentals? What if the shares are in private
unquoted companies for which there is unlikely to be a market?
If it is not possible to realise any capital value for the shares, all the
tax relief in the world is not going to compensate for the hole that will
be left in the taxpayer's financial plans for retirement.
While not wishing to knock these new plans – there is no denying their
tax attract- ions – it is essential not to let the tax tail wag the dog.