APPROVED SCHEMES

All-Employee Share Ownership Plan (AESOP)

The AESOP (also known as the Share Incentive Plan or SIP) is one of the most flexible share-based employee reward schemes ever introduced. In essence, it is four different schemes rolled into one, which enables employers to use any combination of choices to suit their needs. 

An AESOP is what is known as an “all employee” scheme. This means that the right to participate in the scheme must be open to all employees of the company (apart from anyone with a “material interest” – this means directors or anyone with a 25% or greater shareholding in the company), although no employee is obliged to take part. 

Any awards under an AESOP can be made subject to performance criteria, so the management is able to target benefits to those employees who have genuinely contributed to the company’s profits. Because the full tax benefits to employees are only available if they remain within the scheme for five years, an AESOP is also an excellent tool to promote loyalty and workforce retention.

Under an AESOP, there are four main types of award that can be made:

• Free Shares
  
  The employer can allocate free shares to an employee. These are held in trust for a period before being released to the employee. Up to £3,000 worth of shares per annum can be allocated to each employee.
   

• Partnership Shares
  
  The employee can purchase shares out of pre-tax income – effectively the employee gets tax relief for the cost of buying the shares. An employee is able to purchase up to £1,500 worth of shares in a year.
   

• Matching Shares
  
  The employer can offer additional free shares to “match” any partnership shares bought by employees. It is possible to offer anything up to two free matching shares for every partnership share. 
   

• Dividend Shares
   
  While they are held in the trust, the shares will be entitled to receive dividends. If the employee chooses to be paid his dividends, they are taxable in the normal way. He can, however, instead choose to reinvest the dividends into buying additional shares – if he does so, the purchase will be tax-free. Up to £1,500 of dividend can be reinvested in a year.

The Tax Benefits of an AESOP

If the shares stay in trust for five years before release, the employee pays no income tax or national insurance on the shares; if the shares stay in trust for between three and five years, only part of the tax and NIC is due.

If the shares remain in the trust beyond the five years and are sold from within the trust, the employee is not liable to any capital gains tax on the sale.

The company is entitled to corporation tax relief on the cost of the free and matching shares it gives to employees, as well as for any set-up and administration costs of the scheme.

 
AESOPs – Conclusions

The AESOP is a remarkably flexible and generous scheme, which enables ordinary employees to receive extremely valuable tax-free benefits if the company performs well. Its main limitation is the five year lock-in period: this scheme is only suitable for companies with relatively stable long-term employees.
 

 
Save As You Earn (SAYE) Scheme

The SAYE scheme is an option scheme with a parallel savings plan. It is an all-employee scheme (again, directors and 25% shareholders are ineligible to join).

Employees save regular sums out of their salary (maximum £250 a month) over a period of 3, 5 or 7 years, into a special savings account. All interest earned on this account is tax free. At the end of the savings period, the accumulated savings can be used to acquire shares under an option that was granted at the start of the period. If the share value has fallen, or for any other reason the employee does not choose to exercise the option, he can instead receive cash from the savings plan.

If the employee exercises the option, there is no PAYE or NIC due. The shares are now his property, and he can if he wishes sell them immediately – his only tax will be any capital gains tax if he sells the shares. The employee can, however, transfer the shares (within 90 days of exercising the option) into an ISA or a stakeholder pension tax free.

When the option is granted to the employee, the option price must be at least 80% of the value of the shares on the date of grant.

SAYE – Conclusions

The SAYE scheme has been around for 20 years now, and is beginning to look its age. It does not offer a great deal of initial reward to employees, since they effectively finance their own share purchase – the main tax advantages for them will come once they have acquired the shares. If the workforce is already motivated and convinced of the value of share participation, however, the SAYE scheme can encourage long-term employee retention.

 
Enterprise Management Initiative (EMI)

Unlike the previous two schemes, the EMI is not an all-employee scheme: the employer can use it to target benefits to key employees if desired, although it is of course possible to offer benefits to all employees. Any awards can be made subject to performance conditions.

The EMI is an option scheme: the company can grant options to any number of employees, providing that:

§ No employee holds options worth more than £100,000 at any time; and
§ The total value of shares under option does not exceed £3 million.

The option must be capable of being exercised within 10 years of grant, but there need be no other restrictions on the option.

As long as the option price is at least as high as the value of the shares on the day the option was granted, there will be no PAYE or NIC on exercise. If the options were granted at a discount, PAYE and NIC will be due on exercise on the discounted element.

If the shares are subsequently sold, capital gains tax taper relief runs from the date the option was granted rather than the date it was exercised (this is unique to EMI, and gives extremely favourable treatment for capital gains tax).

The main restrictions on EMI apply to the company – it must be carrying on a qualifying trade (excluded trades are the usual Inland Revenue targets of disapproval such as financial business, property rental etc), and its gross assets must not exceed £30 million.
 

EMI – Conclusion

The EMI is a very powerful tool for qualifying companies. It allows total control over who receives benefits, and considerable freedom of choice for the employees who are members. 

The two-year taper period that has been in force since April 2000 means that a 10% capital gains tax charge on any “profit” element is likely to be the only tax ever due.

Unapproved Company Share Schemes

Appendix A