Person using a calculator Home | News & events | Legal updates | 2010 Finance Act: Employee share schemes and trusts

2010 Finance Act: Employee share schemes and trusts

13 May 2010

The Employee Finance Act 2010 contains a couple of minor amendments to approved share option schemes.

Of greater long-term interest is the HM Revenues & Customs (HMRC) announcement of a review of various share scheme structures designed to convert what would otherwise be an income gain into a capital gain.

There is also proposed anti-avoidance legislation on employee benefit trusts (EBTs).

The two changes relating to approved share options are:

Company Share Option Plans (CSOP)

A CSOP is an HMRC-approved option plan under which options can be awarded up to £30,000 of shares.

With effect from 24 March 2010, options cannot be offered over shares in the subsidiary of a listed company.

The reason for the change is that companies have been diverting value into such shares, which HMRC views as tax avoidance.

Existing CSOP options are unaffected. A transitional period of six months will be allowed from 24 March 2010 for companies to amend their CSOP scheme rules to comply with the changes.

Share Incentive Plans (SIPs)

Company contributions to SIPs used to buy shares which are then transferred to employees are normally only tax deductible when the relevant shares are awarded to employees.

However, certain small companies are allowed to fund SIPs to acquire large amounts of shares, where the shares, although released to employees over a period of time, give rise to an immediate corporation tax deduction.

It appears that some companies have used this exception to obtain a large tax deduction where there is no realistic prospect of employees ever receiving shares, as well as ensuring that the shares put into the SIP have no real value. Such planning is now no longer available.

Capital Return Schemes

With the increasing gap between income tax (50%) and capital gains tax (18% or 10%), much effort has been put into designing share schemes generating a capital rather than an income return.

Such schemes include joint share ownership plans, growth shares and carried interest schemes. Provided they are properly implemented, they are effective in mitigating income tax.

HMRC has become increasingly concerned about this and is now conducting a review of these arrangements, possibly with a view to enacting anti-avoidance measures.

EBTS

The Government also announced that anti-avoidance legislation will be introduced to attack the use of EBTs and other vehicles used in remuneration arrangements.

This follows on from the recent HMRC Spotlight Issue 5 on EBTs. It is likely HMRC will want to enact legislation to shut down any perceived loopholes such as the use of sub-trusts, and loans which do not attract an income tax charge.

© Shoosmiths. This page is for general information: it is not legal advice. Please read our full terms and conditions for details of the disclaimers and exclusions which apply.

Get in touch

Niall Murphy

Partner
T: 03700 86 6778
I: +44 (0)1489 61 6778
E: niall.murphy@shoosmiths.co.uk