Time to get your share

Gordon Brown may want to turn Britain into a colder, damper version of Silicon Valley, but what will his measures on promoting entrepreneurial, high-tech companies mean to individuals?The Chancellor's two main proposals are for a new employee share scheme and Capital Gains Tax (CGT) reform. The idea is to get employees and outside investors to pump more into Britain's fast-growing smaller companies.

Taking share schemes first, the most important point is that employees will be able to receive shares in their employers entirely free of income tax and national insurance, as long as they hold on to them for five years.

There are three ways of receiving shares under the new scheme: First, your company can simply give you up to pounds 3,000-worth of shares free, as in an annual bonus. Second, your company can award you "partnership" shares, which you buy out of pre- tax income, up to a value of pounds 1,500. Last, your company can match your purchases of shares up to a ratio of two to one, up to a value of pounds 3,000. What this means is that you can receive a maximum of pounds 7,500 in shares for an investment of just pounds 1,500.

This three-pronged approach means companies can reward employees using up to eight combinations of the new proposals. The Company can decide how complicated - and therefore expensive - it wants its scheme to be. This flexibility extends to company matching staff share purchases on a 1 for 1 basis or less - there is a maximum, but no minimum.

Under existing schemes, any shares sold to you on the partnership basis are taxed on a reducing or "tapered" scale. This means if you sell before five years are up you have to pay income tax on the full contribution you made to buying the shares; between five and seven years you pay tax on 80 per cent of the contribution; between seven and 10 years, it's 60 per cent, and anything over 10 years, you pay tax on 40 per cent. This excruciatingly complex system has been scrapped in favour of making shares tax-free as long as they are held for at least five years.

There is a sting in the tail, compared to existing share schemes. At the moment more than two million people are in Save As You Earn (SAYE) schemes, which enable them to buy shares in their employers each month. If they hold on to the shares for three years, they receive them free of tax. Alternatively they can sell the shares anytime before the three years are up, as long as they pay tax on them.

This, in effect, gives the employees the option of turning their free shares into a cash bonus, albeit a taxed one. This differs from the new scheme, as far as the free bonus shares and the matching shares are concerned.

You will have to hold these shares for a minimum of three years, selling them before the limit only if you leave the company. Then you would have to pay tax on the market value of the shares. (If you leave between three and five years you pay tax on the lower of the value at the time you were given the shares, and the value at the time when you take them out of the plan.)

The Government has imposed this new, lengthier minimum holding period to encourage long-term investing in high-growth companies, and to discourage staff turnover. So what could have been your cash bonus is now locked into your company's share price. As we all know, the value of shares can go down as well as up. Employees could see the value of their bonuses evaporating like Scotch mist if their company hits a bad patch and the share price tanks. Yet the Treasury believes 630,000 people will take up the scheme when it is introduced in July. We shall see.

And so to the equally complex world of Capital Gains Tax (CGT) reform. This is aimed at encouraging entrepreneurs and employees to invest more in smaller, fast- growing companies. Gordon Brown's proposals really pleased only the venture capital industry, because few private investors will hold big enough investments in the companies they work for to qualify for tax relief. That is, unless the Government does cut these minimum amounts "substantially", as it promised to do this week. Present CGT relief rules apply only to employees who own at least a 5 per cent stake in their company, and independent individuals who own a minimum of 25 per cent.

For those who do qualify, the Chancellor is roughly doubling the value of relief. Certain investors, such as higher-rate income tax payers, can reduce their CGT bill from 40 per cent to 24 per cent if they hold the shares for 10 years. This reduction is "tapered" in annual stages in relation to how long the shares are held.

The Chancellor wants to shorten this "taper", so people who invest for three years will reduce their CGT rate each year in 6 per cent steps, from 40 per cent to 22 per cent. Those who hold the shares for five years will see their CGT rate reduced to 10 per cent.

This should benefit small companies whose shares are not listed on the stockmarket. At present employees retiring from the company face a big CGT bill if they sell their shares on retirement. This tempts them to sit on the shares, relying on the dividends for a handy income in old age. This prevents ownership of these small companies passing on to younger employees.

This week's proposed reforms should encourage many retiring employees to sell their shares to younger colleagues. But only if they qualify for whatever minimum holding the Chancellor now decides on. That's the crux.

If you would like more information on the new share scheme, whether you are a company wanting to set one up or an employee, contact ProShare on 0171 600 0984

www.proshare.org.uk

You can also get information from the Inland Revenue's website on www. inlandrevenue.gov.uk/shareschemes

IN WITH THE NEW AND OUT WITH THE OLD?

IAN SUTHERLAND is finance director of TTP Group, a high-tech consultancy with 400 employeesbased near Cambridge. His company is exactly the kind of fast-growing, Silicon-Valley style business the Chancellor had in mind with his "Budget for Enterprise".

TTP has operated a profit-sharing scheme for all employees since 1990 and an approved discretionary share option scheme for the past three years. So Mr Sutherland is intensely interested in Mr Brown's proposals both on share schemes and Capital Gains Tax (CGT) reform.

Mr Sutherland cautiously welcomes the move on share schemes as "innovative and flexible", but is worried about what will happen to existing schemes. "We know new things they're offering, but we don't know yet what they're taking away," he says. The Government has not decided whether existing Save As You Earn (SAYE) schemes, will be superseded by the new offering, or run alongside them. Under TTP's existing profit-sharing scheme, employees are given free shares free of tax if kept for a minimum of three years. Mr Sutherland says more than 90 per cent of staff hang on to their shares, as do 87 per cent for staff who have left the company. Nearly 60 staff have made a paper profit of pounds 20,000 each since the launch of the profit share. The set-up is popular with staff and easy to run, being administered by TTP. The company uses lawyers for occasional advice and share-registration agents to keep the records.

One thing that dismays Mr Sutherland is that shares will have to be held by staff for at least five years to get the full tax relief, which is too long, he says. "Many people go through many different jobs, and may stay in the same one for only two or three years. These people would lose with the five-year rule." He also thinks the three strands to the proposals - free shares, partnership shares and matching shares - means the new system may be more complicated to run, and more expensive.

The biggest irony of all these schemes, he says, is the difficulty of selling them to employees. "They think that if its good for them, there must be a catch - what's in it for the company?" Good communication from the employers is the key, says Mr Sutherland, and he has no doubt Mr Brown's share plans will be a winner.

But he feels Mr Brown's suggestions for Capital Gains Tax (CGT) reform will have no effect on his company or employees. The minimum investment to be held before qualifying for CGT is too high, he says. At present, an employee needs to own at least 5 per cent of the company to qualify.

The Government is considering lowering this limit "substantially" before the reforms become law next April. If they brought the minimum down to 1 per cent stake, says Mr Sutherland, several employees in TTP Group would benefit. Over to you, Mr Brown.