Employee Share Scheme

RubyBish

A relative has been offered the chance to start buying shares in their employer.
They have fixed the price at 20% discount of the current trading price.
Aside from the risk of the fluctuations in price what are the pros and cons of these schemes?
I guess the 20% discount is really the income tax rebate rather than the employer being generous.
Do they loose the discount if they leave or sell the shares before 5 years?

PBA

Doesn't sound like the company is offering a discount at all, just the tax advantage. Our company offered something similar, and while it seems like a good idea in theory, it turned out that you'd only benefit if you stayed with the company more than 5 years. Plus it seemed much more sensible to me to set up a monthly savings plan investing in various shares rather than just buying shares in one company.

DRS1

If this is what I think it is then it can be a good deal. Your relative should have or be able to get a booklet which explains how the scheme works and they can check what I say below against that booklet.

I think this scheme is what is otherwise known as a sharesave scheme or savings related share option scheme.

These schemes mean you save a fixed amount each month with a bank or building society for a period of time (5 years in this case but some schemes can run for 3 years). At the end of the 5 years you get a tax free bonus - at a rate which is fixed at the start of the period. One question is what that rate is - the rate is set by the government so don't blame the employer or the bank/building society if it is not very good. I imagine the rates have been going up because of base rate increases but I haven't been keeping track.

At the end of the five years you take the savings and the bonus and you can use it to buy shares at the price fixed at the outset (ie in your case at the 20% discount to today's price). You do not have to buy the shares so if the share price has dropped you can just keep the money.

The other thing is that (except for certain early exercises) any gain you make when you sell the shares is subject to capital gains tax instead of income tax. For many people that can mean no tax at all because the gain is often covered by your annual allowance.

The 20% discount is not an income tax rebate. The scheme is (I would hope) a tax approved scheme which means that you do not get taxed on the discount. If your employer simply sold you shares now for 20% less than they are worth without using a tax approved scheme to do it that would get you an income tax charge on the 20% discount.

You ask what happens if they leave or sell the shares early. The booklet should explain that but if it is the scheme I think then you may be able to cash in the savings to date getting a lower rate of interest on them than if you completed the full five years. Depending on why you left you may be able to buy the shares but if you just up and leave of your own accord you lose that right, the reason for leaving would have to be something like redundancy. This area is not entirely straightforward and I cannot remember all the detail so it is best just to look at the booklet or ask. The key thing though is that you don't lose the savings and if you do lose the right to buy the shares (or decide not to buy them because the share price has fallen to below the price you can buy at) then you can always complete the savings with the bank or building society and qualify for the bonus.

One nasty bit was that if you left in the first year and stopped contributing then you just get your money back without any interest.

After all that it will probably turn out to be a completely different scheme.

Whether your relative want to put all their eggs in one basket is of course up to them - spreading the risk as PBA says is more sensible but many employees feel they are better placed to judge how good an investment their employer is than to forma view about other companies. Also is you do have the ability to put of the decision about whether to buy until then end so that you can compare today's 20% discounted price with the price then it is a pretty safe bet because you can decide only to buy if you are going to make money by doing so and many employers will help you sell the shares straightaway if you want.

I am of course assuming that the employer is one whose shares can be sold easily (eg listed on the stock exchange?). if not that raises the issue of how you would ever cash in the shares.

barak

DRS1 wrote: »

If this is what I think it is then it can be a good deal.

Agreed - I made a small fortune out of one of the earlier SAYE schemes, although I am not up to date with what is available today. The 20% is a real discount, and the offer should be carefully investigated.