Jonathan Watts-Lay explains the attractions of SAYE schemes offered by employers, and how best to manage them when they mature.
Save As You Earn (SAYE) schemes offer employees the chance to save regularly into a savings account, the option of buying shares in the company at the price they were when the scheme started (or less in some cases), and the security that if markets fall, they will get back their original savings upon maturity; but if their company does well and their share price rises, they have the chance to realise what could be significant amounts.
So is it good to save in these schemes, and for those employees with schemes that have recently matured, or are due to mature soon, what can they do to reduce or even eliminate a potential capital gains tax (CGT) liability?
If an employer offers a SAYE share scheme, it is usually a good idea for individuals to pay money in. They really are the best of both worlds, with the chance to realise significant sums at maturity if the company’s share price does well; if it doesn’t, then at least your savings are returned in full.
Exercising the option allows you to purchase shares in your employer – but it is risky to have most of your savings invested in the shares of just one company. It might therefore be worth considering diversifying the shares purchased into a broader range of investments – in other words taking steps to avoid having all your eggs in one basket.
For those in schemes that have recently matured or are due to mature soon, there are a few things that can be done to protect their windfall from potential capital gains tax (CGT) and manage it in the most tax-efficient way. Gains on shares are broadly the difference between the value of the shares when sold and the cost of acquiring them. CGT is payable if your total gains in a tax year exceeds the annual exempt amount – presently £11,300. But if the gain on your shares is greater than your annual exemption, there is action you can take to reduce or even eliminate the potential tax payable.
First, the sale of shares can be split over multiple tax years, making use of each year’s exemption. For example, assuming the exemption remains at £11,300 for the 2018/19 tax year, £22,600 of gains could be sheltered from CGT over the next two years.
Secondly, transfers to a spouse or civil partner are exempt from CGT; by making such a transfer you can make use of your partner’s CGT allowance. It should be noted that the transfer to a spouse or civil partner should be considered as an outright gift. Also, whilst deferring the sale of shares, the value can of course fall as well as rise and is therefore at market risk during this period.
Finally, employees can also carry out an ‘in specie’ transfer of the shares into an Isa within 90 days of exercising the option. The value of shares transferred has to be within the Isa allowance, which is £20,000 for 2017/18, and any gain on the shares transferred is exempt from CGT. Many high street Isa providers can’t facilitate an in specie transfer, so you may need to use a workplace Isa or a specialist provider.
Due to the timing of many SAYE scheme maturities, it may be possible to transfer shares to an Isa over two consecutive tax years, so long as the 90-day period straddles the tax year end. If the Isa allowance remains at £20,000 this would potentially allow up to £40,000 of your share scheme capital to be invested into a tax-efficient Isa wrapper.
Those who want to cash in their shares can mitigate CGT by transferring shares into an Isa before selling them and withdrawing the money. However, it is important to remember that for the brief time they hold the shares, they are exposed to market risk (for example, if there was a sudden share price crash), and there will also be Isa charges to consider.
It should also be noted that they will not be able to reinvest in an Isa for that tax year unless the shares were invested in a Flexible Isa, but then the subscription has to be replaced to that same provider.
Many employers offer financial education to their employees to help them understand the opportunities available to them. If you have a scheme that has recently matured, or is due to mature soon, speak to your employer to see what support is available to help you understand your options.
Jonathan Watts-Lay is director, WEALTH at work, a leading provider of financial education, guidance and advice in the workplace.
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