The advantage of paying capital gains tax on profits, before the Chancellor's decision to impose income tax, was that the first pounds 6,000 was free of tax. Top income and capital gains tax rates are the same at 40 per cent.
The discretionary share option scheme was one of three similar arrangements introduced to encourage share ownership. The other two are to continue.
In a savings-related share option scheme, started in 1980 and now used by 1,400 companies, employees can be given options to buy shares in their companies at a fixed price at least five years ahead.
At the same time, employees each put between pounds 10 and pounds 250 a month into a Save as You Earn Contract with National Savings or a building society or bank, to produce the sum needed to pay for the shares.
The savings contract adds a bonus equivalent to nine months' payments after five years, giving a maximum of pounds 17,250 to buy shares - or a further nine months' payments if the account is kept open another two years.
If the share price is higher than the exercise price, the employee can exercise the options and pay for them from the savings account. When the shares are eventually sold, the profit is liable to capital gains tax, with a pounds 6,000 allowance.
If the share price is lower than the exercise price, then the savings can be withdrawn, complete with bonus, and the options left to expire at no cost to the saver.
The other scheme left in operation is profit-sharing - started in 1979 - under which 1,158 companies have set up trust funds to buy shares on behalf of employees. The company gets corporation tax relief on the cost of buying the shares.
If the employees leave their shares with the trust for at least five years, they are exempt from income tax but are subject to capital gains tax on any profits. Employees are allowed to be given each year shares worth pounds 3,000 or 10 per cent of salary up to a maximum of pounds 8,000. The shares can be transferred into a personal equity plan, which has further tax advantages.Reuse content