UK: New Legislation Set to Boost Share Incentive Plans

New legislation designed to encourage wider employee share ownership received Royal Assent in early November. The provisions of the Employee Share Schemes Act 2002 will take effect from 6 April 2003. The Act will provide a particular boost to the use of the Inland Revenue approved Share Incentive Plan (SIP).

Under the new Act, if certain conditions are met companies will be able to obtain an up-front corporation tax deduction in respect of payments to a SIP Trust for the purchase of shares to be used in the SIP. Previously, a company was only able to obtain a deduction when the shares were distributed to employees but under the new provisions the deduction will be allowed in the accounting period in which the payment is made.

In order for the up front deduction to be permitted: the SIP trustees must actually use the money to buy shares; the shares must not be acquired from a company; and the trust must at the end of the 12 month period following the acquisition hold at least 10% of the ordinary share capital of the company. Shares already awarded to employees under the SIP will count towards this 10% limit as long as they continue to be subject to the terms of the plan.

The benefit of the deduction may be withdrawn if either 30% of the shares acquired using the payment have not been awarded under the plan within 5 years of the acquisition; or not all of the shares so acquired have been awarded within 10 years of acquisition. The relief only extends to awards of shares to Schedule E tax payers.

Additionally in order to allow greater employee involvement in the management of the SIP, the Act will enable employees to act as trustees of the SIP trust. The Act sets down a framework for a board of professional trustees and employee representatives. However, it will not be obligatory to involve employee representatives in this way.

The Act also extends the period for which SIP trustees are exempt from capital gains tax and income tax in respect of shares held in the plan, but only if the above conditions to qualify for the up-front corporation tax deduction are met.

The exemption means that a transfer of shares to participants within the exempt period is not subject to capital gains tax. Also, any dividends on plan shares paid to the trustees during the exempt period are not subject to the 25% capital gains tax charge normally applicable to trustees. (The standard 10% rate would instead apply to the dividends but this would ordinarily be covered by the dividend tax credit).

Currently the exempt period is only two years for shares for which there is a ready market, and five years for other shares. However, under the Act, where the SIP trust holds shares which were acquired using funds provided by the company to which the new up-front corporation tax deduction applies, the trustees will benefit from the above exemptions for a period of 10 years from the acquisition of the shares by the trustees.

The enactment of this legislation further demonstrates the Government's policy to encourage more companies to support employee share ownership. This Act will make it easier for companies to motivate their staff and involve the workforce in the management of the business by the use of share incentives.