This demonstrates the Government's seriousness about encouraging more companies to embrace an employee owned model. They really have put their money where their mouth is.
From April 2014, the overall £75 million in the pot will fund tax reliefs to support the growth of employee owned businesses. So what are the tax reliefs that are to be conferred?
From April 2014, there will be a complete capital gains tax exemption conferred on individual shareholders transferring a controlling interest in a company into a trust for the benefit of that company's employees. This will be of particular interest to those business owners who are considering retirement and who are looking to pass ownership succession benefits to their management, but who do not wish employees to ever own the company shares directly (i.e. the trust becomes the controlling shareholder and the trust is set up to benefit the past, present and future employees).
At present such business owners currently hope to realise gains on the sale of their shares in a manner that enables them to claim entrepreneurs' relief and therefore suffer only a 10% tax charge on gains up to £10m. What this announcement means is that a new exemption and therefore zero tax (potentially on an uncapped basis) will result if the share transfer (from the business owner to the trust) is deferred until after 5 April 2014. Transfers of shares and other assets to such employee ownership trusts will also be exempt from inheritance tax (IHT) providing certain conditions are met.
From October of next year, companies which are indirectly owned by their employees (i.e. following the John Lewis style model described above) will be able to pay their staff bonuses more tax efficiently. An income tax exemption has now been promised for cash bonuses and the amount of bonus that will attract this relief is to be capped at £3,600 per annum. This welcome change will boost such companies' capacity to incentivise employees and help "lock in" the accepted cultural benefits of an employee owned structure.
Businesses who wish to invite all their employees to own shares in their employer will be able to offer much more generous awards to staff. One of the most popular arrangements for achieving such all employee direct ownership is a Share Incentive Plan (SIP). This arrangement has a 5-year maturity date and means that, after 5 years, employees can sell their shares and pocket gains completely tax-free.
The SIP has various constituent modules and employers can pick and choose which modules to use from year to year. Those companies wanting to reward loyal staff with Free Shares (i.e. gift shares at no cost to staff) will be delighted with the news that the value of Free Shares that may now be given to each employee each tax year is increasing from £3,000 to £3,600 from April 2014. Where employees are invited to purchase shares from their gross salary, under the Partnership Share module of a SIP, the limit for this is increasing from £1,500 to £1,800 per employee per tax year to £1,800. This is the first time these limits have increased since 2001, and demonstrates a strong endorsement of share ownership schemes' ability to align employer and employee interests. FDs and HR directors up and down the land should be delighted with this news as Partnership Shares in effect represent salary sacrifice equity awards and therefore high engagement and take up by larger workforces can result in significant payroll savings for the employer company.
For the first time in a decade, the Government has also doubled the limit on the amount employees can pay into Save As You Earn (SAYE) schemes, which allow staff to save a portion of their monthly salary (currently up to £250 per month but rising to £500 from April 2014) and convert this to company shares at a discount of up to 20%. This long-overdue reform should give a welcome boost to employees looking to steadily acquire a greater stake in the business they are helping to build.
With last week's announcements, the chancellor has given his backing to businesses looking to give their employees shares, and to employees looking to take a greater ownership stake. However, some details of how his plans will work are still to be set out - for instance whether a controlling share of a business must be sold to the trust in one go to receive Capital Gains Tax relief, or whether this can occur over a period of time. Next week's draft Finance Bill is worth watching for clarification on these issues.
It is also worth noting that the tax reliefs discussed at the beginning of this article in relation to CGT, IHT and income tax on bonus payments will only apply to companies that are indirectly owned by employees; i.e. where shares representing a controlling interest are held collectively by a trust on behalf of staff, rather than where employees buy shares directly. The increased SIP and SAYE limits are the chancellor's way of ensuring that employers who adopt a more traditional direct ownership approach, or indeed a mixed approached, can also incentivise staff more from April 2014.
In conclusion, this year's Autumn Statement served as a strong commitment by Government to incentivise and support employee ownership in the UK economy. While we will have wait until the draft Finance Bill publication on 10 December to see the legislative detail setting out how these reliefs will be applied, the Chancellor's announcement is a very welcome step towards aligning employee-employer relations and staff reward and UK productivity.
Liz Hunter (pictured) is director at share plan advisory firm RM2