National Insurance Contributions, Capital Gains Tax Relief, Corporation Tax Deductions and Enterprise Management Incentives

Wider employee share ownership continues to be a major aim of the UK Government. Recent legislation and new proposals make employee share ownership even more attractive and will continue to promote this aim.

Since 6 April 1999 National Insurance Contributions (NICs) have been payable, both by employees and employers, on the gains arising where unapproved share options are exercised, and the shares acquired are "readily convertible assets" (in essence, the shares can be sold on a recognised investment exchange, or trading arrangements exist or are likely to come into existence to enable those shares to be sold).

The UK Government recently recognised that the unpredictability of the liability on companies, in respect of unapproved share option gains, is of great concern. Its response was the introduction, in July 2000, of legislation to allow employees to bear the employer's NIC when they exercise their share options. This can be done by agreement (in which case the NIC liability remains that of the employer with a right of recovery from the employee) or by formal election (in which case the NIC liability shifts from the employer to the employee).

As an alternative, or in addition, to passing on their NIC charge, companies also look into the possibility of hedging their liability by funding an employee benefit trust to acquire shares which are later sold with the proceeds used to meet the NIC liability.

Capital gains tax

In the last Parliament the UK Government reformed the capital gains tax (CGT) regime to create incentives for investment aimed at generating sustained growth. The Finance Acts 2000 and 2001 introduced:

a four year taper that reduces the effective rate of CGT on business assets for a higher rate tax payer from 40 per cent to 10 per cent; and

automatic access to the business assets taper for almost all shares held by employees.

For disposals from April 2002, the Government proposes to improve the CGT business assets taper even more so that the effective rate of tax for a higher rate taxpayer is reduced to 20 per cent after only one year and 10 per cent after only two years.

Corporation tax deduction

Under present arrangements, businesses are not always able to deduct the cost of share options against their corporation tax liabilities. Arrangements can be put in place in the UK to obtain a corporation tax deduction for the "opportunity cost" of granting options i.e. the difference between the exercise price and...