2013 Autumn Statement: £75 Million Fund For Employee Ownership Announced

Posted by admin at 15:51 on 13 Feb 2017


The 2013 Autumn Statement included some very welcome announcements for employee ownership. In a previous article, we discussed the fact that the government is seeking to support companies that wish to adopt an employee ownership model. The latest news from the Chancellor is that the previously announced £50 million fund to encourage and sustain employee ownership will now increase by 50% to £75 million.

RM2 provided a detailed response to the Government's consultation paper on supporting the employee-ownership sector. We can now confirm that the £75 million will help to fund:

  • From April 2014, a capital gains tax relief on the disposal of a controlling interest of shares into a trust, where the trust is used as a vehicle for indirect employee ownership.
  • From October 2014, an income tax exemption on up to £3,600 per annum in bonuses or equivalent payments for employees of companies that are indirectly employee owned.
  • From April 2014, the annual limits for awards under a Share Incentive Plan (SIP) are to increase to £3,600 for Free Shares and £1,800 for Partnership Shares. This is the first time the cap has increased since 2001.
  • From April 2014, the savings contribution limit for the Save As You Earn (SAYE) will also double from £250 to £500 (the first increase in over 20 years).
  • Transfers of shares and other assets to employee ownership trusts will also be exempt from inheritance tax (IHT) providing certain conditions are met.

A reminder about the £75 million fund

We have previously discussed the fund in our blog, '£50 million fund for Employee Ownership – How should it be spent?' A quick summary is as follows:

  • No money will be paid out from the fund, instead it is intended that the above new tax reliefs and increased share plan limits will encourage and support the creation and growth of employee-owned companies.

The tax reliefs will apply only 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 employees, (rather than where employees acquire shares directly). For more information on Employee Benefit Trusts (EBT) please see here.

The first new tax relief is the capital gains tax relief on a controlling share of a business being sold into a trust that is being used to support an indirect employee-ownership structure. This will be of particular interest to those business owners who are considering succession planning, as it provides an opportunity to realise a potentially uncapped CGT exempt gain if a sale is deferred until 6th April 2014 compared with a 10% tax charge, where entrepreneurs' relief applies on gains up to £10 million, on disposals in the current (2013/14) tax year.

Under these proposed plans, the shares may be sold into an Employee Benefit Trust (EBT) where they are retained by the trustees for the benefit of employees (past, present and future). Employees will not be required to acquire shares directly. At present it is unclear whether the controlling share of the business must be sold to the trust in one go, or whether this can occur over a period of time. We also await details of how and if the relief will apply to multiple vendors.

The second tax relief to be announced is the annual income tax exemption on bonuses or equivalent payments of up to £3,600 for employees of companies that are indirectly employee-owned (i.e. following the John Lewis model). The Finance Bill does not state there will be an exemption for employees' and employers' national insurance contributions (NICs). The draft legislation currently anticipates that tax exempt bonus payments will only be possible where the provisions governing the EBT:

  • Do not permit any of the settled property to be applied, at any time, otherwise than for the benefit of all the eligible employees on the same terms.
  • Do not permit the trustees, at any time, to apply any of the settled property by creating a trust, or by transferring property to the trustees of any settlement.
  • Do not permit the trustees, at any time, to make loans to beneficiaries of the trusts.

The legislation is only in draft at the moment and the government has flagged up that it is consulting on how to implement the provisions to pre-existing EBTs who may not currently meet the criteria (which, sadly, will be most of them!) In particular, the limit on transferring property to the trustee of any other settlement could create a number of problems for (1) transferring shares to SIP trusts or (2) to another EBT at the expiry of the 80 or 125 year perpetuity period for the trust.

Additional announcements relate directly to raising the caps imposed on the all-employee SIP and SAYE employee share schemes. Per initial reading of the draft Finance Bill you can have exempt bonuses or increased SIP limits but you cannot enjoy benefits of both. 

Under a SIP, awards must be offered to all employees of a company (an 18 month qualifying period can be included). There are 3 transfer methods that the company can use to provide shares to employees under this plan, and these can be used in conjunction with one and other. The new limits on awards, which will come into effect from April 2014 are as follows:

  • Free Shares – Employees receive free shares in the company. The annual limit will increase from £3,000 worth of shares per person to £3,600.
  • Partnership Shares – Employees purchase shares in the company. The annual limit is to increase from £1,500 per person to £1,800.
  • Matching Shares - The company can offer free 'Matching Shares' to those purchased as Partnership Shares, to a maximum ratio of 2:1.

More and more companies are looking at SIP as a means of funding payroll cost savings in the run up to auto-enrolment as discussed here.

SAYE currently allows employees to save between £5 - £250 per month from their salary each month with a bank or building society. These savings can then be converted to company shares at a discount of up to 20%, providing a simple and attractive arrangement for employees. As of April 2014, the monthly cap on savings will double from £250 to £500.

If you would like to discuss how these recent announcements could affect your business, please e-mail kerrie.willis@rm2.co.uk, or call 020 8949 5522 to speak with one of the RM2 team.