Share and Share Alike

As Rahm Emanuel, President Obama's new chief of staff, recently remarked: 'you should never let a serious crisis go to waste?.

In that spirit, here at Rm2, we are offering you some ideas about how employee share schemes can, and are, being used to beat off the recession, by conserving cash, saving tax and delivering more effective incentives to employees.

Substituting bonuses and pay rises

If bonuses and pay rises are under pressure, offering share based rewards is an option worth considering. They won't deliver immediate cash to the employees but they do deliver the prospects of bigger and better rewards in the future. If a government sponsored scheme is used, the recipient may well save a substantial amount of tax as well.

Under a Share Incentive Plan, your employees are offered up to ?3,000 of company shares per year. The shares are held in trust and after three years, all gains are tax free. After five years, the whole value is tax free and if the shares stay in trust, they can stay tax free indefinitely.

If individual employees elect to sacrifice some of their salary or bonus in exchange for shares, they can be offered yet more free shares and can acquire more than ?7,500 of share value, per annum, each.

Or selected employees could be offered tax efficient share options under schemes such as the Enterprise Management Incentive. When the scheme matures it will deliver any gains at a tax rate of just 18 per cent with no NI to pay - better by far than the tax rates on cash.

Turning shares into value

Whether a company is quoted or unquoted, it can always repurchase its own shares when cash is available. And if the shares are bought back from participants in a government sponsored share scheme, the participants pay much less tax than they would pay on salary or bonus.

In a private company, share repurchases are normally arranged through an employee trust. The RM2 Partnership already operates more than 100 employee trusts which can trade in their sponsoring companies? shares.

Of course shares don't always rise in value. But for most companies, share value depends much more on achieving medium term goals than on short term stock market movements. And because of the tax efficiency of most approved schemes, share values have to fall a long way before employees lose out.

You might want to consider

Offering free shares: Set up a government sponsored share incentive plan. It must be offered to all employees, subject to certain exceptions, but you can deliver significant value over the medium term at low (or no) tax. You can obtain corporation tax relief as well. Find out more.

Already offering free shares? Consider Partnership Shares. These allow employees to substitute gross salary or bonus for shares, up to ?1,500 per annum, and allow the employer to gift further shares, tax-efficiently. More details here.

Offering tax efficient options. There are two tax-efficient, government schemes to choose from: EMI or CSOP. Any gains will be delivered at a low tax rate and linked to the success of the company and you can get corporation tax relief as well.

Already offering options? Now may be the time to look again at vesting periods and conditions. Could the options be offered more widely? If you are already offering the legal maximum, or are not eligible for an approved scheme, you can consider other tax efficient solutions such as the Deferred Share Purchase Plan or Growth Share Plan. All these solutions deliver capital gains at just 18 per cent. (less personal allowances), with no NICs to pay.

All UK government sponsored schemes are subject to detailed rules and conditions. Our job is to provide the necessary guidance and recommend the optimum solutions. To find out more, free, call us now on 020 8949 5522

The RM2 Partnership is a leading independent remuneration consultancy. The firm specialises in tax-efficient equity reward arrangements such as employee share ownership plans, approved and unapproved share option schemes and savings-related share incentive schemes. Visit http://www.rm2.co.uk/ for more information.