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Share of the profits

The new all-employee share ownership plan, as I described last week, is founded on three main types of share – free shares, partnership shares and matching shares.

There are also shares that can be acquired with dividends paid out on the other three types of share.

The plan may provide that all cash dividends are reinvested either on behalf of all participants or those who elect to reinvest their dividends. The holding period for dividend shares must be three years. The total dividend that can be reinvested cannot exceed£1,500 in any tax year.

Where dividends are not required to be reinvested, they must be paid over to the employee as soon as practicable. Surplus amounts may be carried forward for a period of three years but, if not reinvested within this period, must then be paid over to the employee.

The amount applied by the trustees in acquiring dividend shares is not treated as income of the employee, who is not entitled to a tax credit. Where a cash dividend is paid out to an employee, it is taxable in the year in which it is paid, with the tax credit in force at the date of payment.

Shares which are eligible for an all-employee share ownership plan must be ordinary shares which are fully paid up, not redeemable and either:

Listed on a recognised stock exchange;

In a company which is not under the control of another company; or

In a company which is under the control of a company listed on a recognised stock exchange.

Eligible shares must not be subject to any restrictions except in certain defined circumstances. However, the shares may carry no or limited voting rights.

Free or matching shares may be forfeit at any time in the forfeiture period if the employee ceases to be a relevant employee, withdraws the shares or, in the case of matching shares, withdraws the partnership shares in respect of which matching shares were awarded to him.

The plan must provide for the establishment of a trust, which is required by the plan to carry out the transactions already described. Trustees have the power to borrow to acquire shares and for such other purposes as may be specified. The trustees are under a duty to apply PAYE where plan shares cease to be eligible shares. They are also under a duty to maintain such records as may be necessary for the purposes of their PAYE obligations and also the PAYE obligations of the employer company.

The company can claim a corporation tax deduction for amounts paid by the company to the trustees to acquire free or matching shares. In addition, the expenses of setting up and running the scheme are deductible. No deduction is allowed for the expenses in providing shares that are dividend shares.

The plan may provide for the company to terminate the plan. Where the plan is terminated, a copy of the notice must be given to the Inland Revenue, the trustees and each individual who has plan shares or who had entered into a partnership agreement in force immediately before the notice was issued.

The trustees must remove the plan shares from the plan as soon as practicable after the end of the notice period or, if later, the first date when the shares can be removed without giving rise to an income tax charge.

So there you have it – the new all-employee share ownership plan, very attractive but eventually only valuable to the recipients of the shares if at some point the value can be realised.

This is the key factor to bear in mind if consideration is being given to using an all-employee share ownership plan as a pension scheme alternative.

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