Introduction

It is the belief of the government that productivity can be improved by a higher level of employee share ownership. The government has stated that its target is to double the number of companies in the UK which have all employee share schemes. As one of the means to encourage employee share ownership, a new all employee share plan (the "Plan") which is described by the government as "the most tax-advantaged all-employee share plan ever introduced in the UK" is to be introduced.

Details of the Plan are contained in the Finance Bill 2000 and the Plan will formally take effect when the Bill receives Royal Assent (expected to be late July/early August). Some companies have already taken preparatory steps to ensure that the Plan can be put in place as soon as practicable after Royal Assent. To assist companies with the establishment of the Plan, the Inland Revenue has also published model documents.

As the Plan has a trust structure, companies, especially those with a sizeable number of employees,  may well appoint professional trustees to the Plan. Professional trustees who are interested in this area of work should familiarise themselves with the operation of the Plan.

This article summarises the principal features of the Plan and comments on the provisions in the Inland Revenue model trust deed.

 The Plan

 Eligibility

As this is an all employee share plan, all employees of the company establishing the Plan (and, if appropriate, its participating subsidiaries) who fulfil a length of service requirement and who are subject to income tax under Schedule E, Case I in respect of the relevant employment must be invited to participate. Other employees may also be invited. Employees with a substantial shareholding in the company (a "material interest" as defined in the legislation) must, however, be excluded.

Types of shares

Broadly, the Plan is made up of four types of shares:

• the company can give each eligible employee "free shares" worth up to £3,000 each year – the award of free shares may be subject to performance conditions;
• the employee may purchase "partnership shares" (by deduction from gross salary) worth up to £1,500 (or 10% of his salary if less);
• the company may match the employee’s "partnership shares" by providing further "matching shares" – the maximum match is two matching shares for each partnership share;
• dividends may be reinvested in the company’s shares ("dividend shares") up to £1,500 each year.

Trust Structure

The establishment of a trust is essential to the Plan. The legislation provides that the Plan must provide for the establishment of a UK trust with UK resident trustees. Shares awarded under the Plan will initially be held in a trust for a specified holding period:

• free and matching shares are subject to a holding period of between three to five years (as decided by the company) – if the company wishes, these shares can be forfeited if the employee ceases employment prior to the end of the holding period;
• dividend shares are subject to a holding period of three years;
• partnership shares are not subject to a holding period, although if they are withdrawn within a certain period, the matching shares may be forfeited.

If an employee leaves employment during a holding period, the shares (if not forfeited) will have to be withdrawn from the trust.

The tax treatment of the employees in respect of the different types of shares will depend on how long the shares are held in the trust. Broadly:

• if shares are taken out of the trust within three years, an income tax charge will generally arise on the market value of the shares at the date of exit;
• if free and matching shares are taken out of the trust between three and five years, an income tax charge will arise on the market value of the shares on award or, if lower, on exit (or, in the case of partnership shares, on the value of the salary used to buy shares);
• if shares are taken out of the trust after five years, there is no income tax charge.

Where an income tax charge arises, PAYE has to be operated and national insurance is payable if the shares acquired are readily convertible assets (i.e. they are listed on a stock exchange or trading arrangements exist in respect of them).

Where an employee agrees to purchase partnership shares, the trustees are responsible for effecting the purchase. The trustees are also responsible for depositing the salary deducted (pending purchase) with a bank or building society or similar and accounting to the employees for any interest. Similarly, if dividends are to be used to purchase further shares, the trustees are responsible for effecting the reinvestment.

The legislation also sets out various powers and duties of the trustees:

• the trustees may have power to borrow to acquire shares for the Plan or for other purposes specified in the trust;
• the trustees must give notice to the employee as soon as practicable after shares are awarded to him giving details such as the number and types of shares, their market value and holding period;
• the trustees must not dispose of shares in the Plan other than in accordance with the valid instructions of the employee concerned;
• the trustees must keep records for their own and the employer company’s PAYE obligations in relation to the Plan.

Inland Revenue Model Trust Deed

To assist companies in the establishment of the Plan, the Inland Revenue has published a model trust deed and rules which a company may, if it wishes, use as the basis for its Plan. The model documents are written in reasonably plain English. Apart from reflecting the operation of the Plan, the principal provisions which professional trustees taking on trusteeship of a Plan should be aware of include:

• the perpetuity period for the trust is 80 years;
• there will either be a corporate trustee or at least two individual trustees;
• the appointment and removal of a trustee is vested in the company setting up the Plan . A trustee may also resign by giving the company one month’s written notice – this is, however, subject to there being a corporate trustee or two individual trustees after retirement;
• there are some strict rules relating to dealings with shares held under the Plan – these reflect the operation of the Plan. The trustees have power to invest any surplus assets as if they were the beneficial owner. Importantly for a plan of this nature, the trustees have no obligation to diversify investments;
• the Plan may be amended by the company with the trustees’ consent – no amendment can be made which would adversely and materially prejudice the rights attaching to shares awarded to or acquired by employees or give the participating companies a beneficial interest in the shares in the Plan. Amendments to a key feature of the Plan (as defined in the legislation) will require Inland Revenue approval;
• there are various provisions for the protection of the trustees:

• the trustees may rely on information supplied by the company in respect of the eligibility of an employee;
• the trustees may delegate their powers, duties or discretions and appoint nominees – such delegation or appointment does not, however, divest the trustees of their responsibilities;
• a trustee is not liable to account for any benefit accruing to him by virtue of his participating in the Plan, his ownership of shares in the company or his being a director or employee of a participating company;
• all costs and expenses of the Plan are met by the participating companies;

• the trustees are indemnified by the participating companies against all liabilities which cannot be recovered from the assets in the Plan other than liabilities arising through fraud or wilful wrongdoing or where such liabilities are covered by insurance;

• a trustee may charge for services.

While the provisions give the trustees not insubstantial protection, a professional trustee should note that:

• he is liable for breach of trust over and above the extent to which he is indemnified by the participating companies;
• only a lay trustee is expressly allowed to take out insurance cover for loss caused by him.
• Professional trustees may need to consider whether further provisions should be negotiated with the company before taking on the trusteeship. For example:

• a provision enabling a trustee to resign and be properly discharged (without regard to the composition of the remaining trustees);
• an express provision that the trustees do not need to involve themselves in the management or conduct of the affairs of the company (whose shares the trustees are holding under the Plan);
• an express power to take out insurance for the trustees’ own liability;
• a general power to do whatever is desirable or necessary for the purposes of the Plan.

Conclusion

The new all employee share plans represent a potential source of new work for professional trustees. Those who are interested in this area of work will need to familiarise themselves with the operation of the Plan and consider what (if any) changes they will require to the model documents before taking on the trusteeship.

Monica Ma,  Partner
Employee Benefits Unit, Simmons & Simmons