RE: EOnation: UK Tax Policy and Unanticipated Consequences

["Langley, Aidan (UK)" <alangley@deloitte.co.uk>]

     Dear Jacquelyn
     
     I didn't mean to suggest that the AESOP won't encourage employee 
     shareholding; it certainly will do that - but only for the five-year 
     holding period.
     
     Once that expires, the only reason to keep the shares in the AESOP, 
     rather than spend the cash or diversify the investment, is the capital 
     gains tax relief. And that is only useful to a small minority of 
     employees.
     
     The reason for this is that there is an annual exemption for the first 
     GBP 7,500 of realised gains on investments, or GBP 15,000 for a 
     married couple. In US dollar terms this is around $12,500 or $25,000. 
     You don't pay the capital gains tax unless your gains exceed this 
     exemption amount.
     
     Only about 5% of the UK population actually have investment portfolios 
     which are big enough to make annual realised gains of that magnitude, 
     so only about 5% ever pay capital gains tax. 
     
I agree your point that employees will not retain their shares unless
compelled 
to do so. The economic pressures on them to sell or diversify are very
strong.

As to whether Government foresaw this, I think Government is aware that it
only 
has a limited number of tools with which to affect people's behaviour, and
the 
CGT relief was the only tool available to encourage shareholding beyond the 
five-year period.

Government could, I suppose have lengthened the compulsory holding period
to, 
say, seven or ten years. But Government has to rely on employers to
establish 
AESOPs and introduce them. Employees would have regarded a seven-year period
as 
too long, so employers would have been less inclined to introduce AESOPs.

Financial education is indeed recognised as important, but the actual use of

these in practice is patchy. This is due to cost constraints on HR
departments 
in employers. Certainly, whenever I am advising a client on a new AESOP I
will 
stress the importance of financial education, but many clients will not have
a 
budget to pay for the additional consulting work required. On the other
hand, 
there are shining examples of companies which are willing to invest in this 
area, and, yes, those tend to be high-performing companies. BP Amoco, a
company 
I know well, is an example. 

We have an organisation here called ProShare (http://www.proshare.org.uk)
which 
is very good at providing financial education services to employees.

On a separate point, has this group discussed the practical difficulties of 
operating employee share plans in unquoted companies? If so, could you
direct me
to the thread of correspondence and I might want to add some thoughts



______________________________ Reply Separator
_________________________________
Subject: EOnation: UK Tax Policy and Unanticipated Consequences
Author:  "Jacquelyn Yates" <SMTP:Yates@salem.kent.edu> at UK
Date:    20/04/2001 04:01


Dear Aidan, I would not have realized that the AESOP policy wouldn't
encourage 
employee shareholding -- it sounds like such a good deal.  I am wondering
how it
is that most employees wouldn't be liable for some capital gains tax. What's
the
reason for that?  Is capital gains tax in the UK progressively structured
and 
proportional to income?
     
Your point shows that well-intentioned fiscal incentives can be perverse. Do
you
think the Government had any idea of this problem when they adopted the new 
policy?
     
Your response pushed me further in thinking that if government policy
doesn't 
compel employees to hold their shares for a long period, they probably won't
do 
so.
     
I guess that shareholding is a also new experience for the average employee,
and
that education is needed before they can see how the benefits can work.
Most 
employees don't understand the management of enterprises,  and they don't
have 
enough information to connect their activities in the cubicle or on the shop

floor with improvement in stock value.  Nor do they have the skills needed
to 
convert their individual knowledge of how to improve the enterprise into a 
common plan of action.
     
U.S. research shows that employee-owned companies outperform their
traditional 
counterparts only when there is employee participation in firm management
and 
governance.  And participation is the best kind of education -- experiential

education.
     
What kinds of employee education and training are happening in the AESOP 
companies?
     
     
     
     
--
Jacquelyn Yates, Ph.D.
Political Science
Kent State University - Salem
2491 S.R. 45 South
Salem, OH 44460
     
yates@mail.salem.kent.edu
FAX  330-332-9256
Tel. 330-337-4282
     
     
     
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