Over 2.3 million people are contributing to Sharesave schemes, and while some will lose out from this year’s changes to Capital Gains Tax, most will still be able to bank tax-free profits.
Over 960 UK companies operate Sharesave schemes, where employees save from £5 to £250 per month and have the right to buy shares at a discount to the price when they signed up. Often, by the time the scheme matures, the share price will be at a much higher level and you will make a handsome profit.
There are three terms you can sign up for: 3, 5 or 7 years. At maturity, you don’t have to use the proceeds to buy shares - you can take cash plus a tax-free bonus. The bonus is 2.84% after three years, 3.22% after five years and 3.36% after seven years, and though these bonuses are tax-free they’re still well below what you could earn on your cash elsewhere. But if you choose to buy shares with the cash in your account, you get a tax-free bonus of 1.6, 5.1 or 9.8 times your monthly contribution.
Discounted shares on offer
The shares are usually allocated at a price 20% below the price in the market when you signed up. Over a three-year period, the final price may end up below that, as it did with many companies in 2003. But over a seven-year period, most companies’ share prices end up significantly higher, and that plus the 20% discount can mean big profits.
If you can afford to save for seven years, this is the best way to do it since the longer the term you save for, the better your chances of coming out a profit.
Only companies with a UK share listing can offer these plans, so foreign-owned and registered companies aren’t eligible and nor are private firms. The majority of the UK’s top 100 companies offer these plans and they are well worth considering as part of your overall savings.
But do not put all your eggs in the Sharesave basket. Even what seem strong companies can go through bad periods in which their share price slumps, and some of the UK’s top 100 companies even went bust in the 2001-03 bear market.
Ways to avoid tax on profits
This year’s changes to Capital Gains Tax were not good news for Sharesave schemes and ifsproshare, the trade body for Sharesave operators, objected to them vociferously but without success.
Up to April 5th 2007, profits you made when you sold shares acquired through Sharesave schemes were taxed as ‘business assets’, which meant a tax rate of 5% for basic rate taxpayers and 10% for higher rate taxpayers. From April 6th 2008, any profit above the annual tax-free gains allowance of £9,600 is taxable at a flat rate of 18% regardless of your personal income tax status.
Many Sharesave members do make gains above £9,600, but that doesn’t mean they need to end up paying 18% tax. For a start, they can sell their shares in tranches so that they don’t make a profit of more than £9,600 during a tax year.
Share transfer
Second, you are allowed to transfer Sharesave shares into an ISA up to the normal annual limit of £7,200, with the value of the share being calculated on the market price on the date of transfer. No CGT is payable on such a transfer, so all you need to do is set up an ISA account with an execution-only stockbroker, transfer the shares in and then you can sell them free of tax.
Third, you can transfer shares to your legal spouse without incurring any CGT. The recipient takes over the shares at the same price you ‘bought’ them for, but can use their own personal £9,600 allowance to sell shares without actually incurring any tax.
