The Government certainly seems to think so if its activity in amending and introducing new employee share schemes is anything to go by.
Now, all of this is not to say that financial advisers need to be able to implement share schemes. After all, one would not necessarily expect share scheme specialists (largely lawyers and accountants) to both advise on and implement pension arrangements.
Of course, for out-and-out employee benefits specialists, one would expect the implemen tation of all types of pension and share scheme to be on the menu but maybe they would not purport to also specialise in mortgages, investments, protection or estate planning.
The adviser should, however, understand share schemes so as to be able to communicate clearly on their features, benefits and downsides. Where it is desired to offer implementation, it may make sense for the adviser (where it is possible from a regulatory standpoint) to form an alliance with a firm which specialises in this area, perhaps seeking to offer specialist financial advice for the unserved needs of clients of the alliance partner.
Such arrangements are classic examples of maximising the returns on one's skills and competences. Such mutual delivery of specialist services is the basis on which many a solid relationship is founded. But I am sure most if not all of you know that already.
When it comes to share schemes, then it is essential, if only from a defensive standpoint, to at least know about them to maintain credibility. There are many different types of share scheme available and numbers have increased substantially over the last few years. It would not be surprising, therefore, if non-specialist advisers as well as clients were a little confused over the choices available. Understanding can be aided by a systematic approach that groups the schemes available under two main headings:
Option schemes including:
– Approved option schemes.
– Approved savings-related schemes.
– Enterprise management incentive schemes.
– Unapproved schemes.
– Phantom schemes – not really share options but schemes providing a cash bonus based on some measure of the company's performance such as its share price.
Other schemes including:
– Approved profit-sharing schemes.
– Employee share ownership trusts – statutory and non-statutory.
– All employee share ownership plans.
Let us look at all these in more detail starting with option schemes. I believe the best place to start on this journey of discovery is with unapproved schemes. By understanding these and their tax consequences, one can better understand the benefits of approved schemes. So, here goes Under an unapproved scheme, there is usually no charge on grant of the option unless the option is capable of being exercised more than 10 years after the grant or seven years if the grant was before April 6, 1998.
There will, however, be an income tax charge when the option is exercised based on the difference between the open market value at the time of exercise of the option and the option price. This is the major negative attaching to unapproved schemes, namely, that the tax charge arises on exercise of the option (when an imminent actual disposal may not be planned) and that the charge is to income tax and not capital gains tax.
This means no annual exemption and no taper relief are available. A National Insurance charge will, however, only arise at this time if the shares in question are readily convertible assets.
National Insurance was not relevant in respect of share options until December 5, 1996. From that date until April 5, 1999, employer's and employee's NICs were due on the grant of an option under an unapproved scheme where the exercise price was at a discount to the market value of the underlying shares at the date of the grant. For options issued on or after April 6, 1999, NICs are made when the option is exercised (not when it is granted) over shares that are regarded as readily convertible assets.
The shares will be treated as readily convertible if there are arrangements in place to enable a person to realise money from them. This definition would include the fact that the shares could be sold or otherwise realised on a recognised stock exchange. Where the charge does apply, it applies to the notional gain realised when the option in exercised.
The one exception to this rule in respect of options granted on or after April 6, 1999 is that NICs will be charged on the grant of the option but only if the option exercise price is discounted from the market value of the underlying shares at the date of the grant where the option has a life of more than 10 years and the underlying shares are readily convertible assets.
There could also be capital gains tax on the disposal of the shares. Any gain will be based on the increase in value over the open market value of the shares on acquisition, that is, at the point the option was exercised. With all this going on, it is not surprising that the attention of many employers turns first to approved schemes and this is what I will look at in my next article.