By Ifty Nasir is co-founder and CEO of Vestd, the Share Scheme platform.
At the Labour Party Conference their Shadow Chancellor, John McDonnell, again referred to the party’s intention to introduce the ‘Inclusive Ownership Fund’. If it comes into force, around 7,000 UK companies – those with more than 250 employees – will be forced to give workers a suggested maximum 10% ‘stake’ in the company they work for.
The Labour Party are presenting the scheme as an effective way of handing equity and power to the workers, but all it will actually do is destroy value for investors and does a great disservice to the benefits of truly sharing ownership, a powerful device that many thousands of UK companies already deploy.
What is the IOF Share Ownership Model?
Employees won’t really own anything, because shares in an IOF cannot be sold. They will not therefore benefit from the capital appreciation in ‘their’ equity, and worse, their slice of profits is capped at just £500 per employee.
This is nothing like the John Lewis model, where employees are truly partners, under IOF people would only get partial rights to dividends – a share of artificially capped profits.
If profits are higher than £500 then the government will claim the difference. This will be a significant money grab by the Government as most of the profitable FTSE 100 companies generate thousands of pounds of profits per employee.
IOF has some similarities to an employee owned trust, which many larger companies have adopted. EOTs give employees rights to shares and dividends, but only while working for the business. Once people leave, they are no longer shareholders and have no ongoing rights.
But this is very different to the true share schemes run by many companies that give employees actual shares (or options, which are the rights to shares if certain conditions are met). These schemes can continue to reward people after they have left the business. Their contribution will continue to be valued, they can continue to own the equity and any appreciation in business value they help to create, and they can be rewarded long after they have moved on.
What will be the impact?
At the maximum representation of 10%, the combined vote of all of these workers will be very much in the minority, and therefore the notion of ‘control’ suggested in the IOF proposal is non-existant under normal circumstances. However, if prefered voting rights are issued to these shares to ptovide that ‘control’,this is likely to put other people off investing in the business, due to the disproportionate power that this minority may then wield. In this scenario, the tail doesn’t wag the dog, it has the potential to actually stop the dog from walking.
We can therefore expect to see a shareholder exodus, and private companies will find their funding options greatly reduced.
In practical terms, Labour’s proposal will – over time – reduce the value of all participating companies by 10%. This is quite the opposite of what company directors and senior managers are expected to do: the legal obligations of a Board are to act legally in the best interest of the company and maximise shareholder value.
The net effect of IOFs will be to reduce shareholder value by 10% while effectively increasing Corporation Tax beyond the 26% Labour has proposed, potentially to a rate of more than 30%, if recent analysis proves to be correct.
Will the companies be forced to pay dividends? Many companies choose not to issue dividends, even after reporting sizeable profits, for some very valid business reasons, such as investing in growth.
What will be the impact for companies that are rapidly growing and about to reach the threshold of 250 employees? At that point they will be forced to implement the scheme, devaluing their business in the process. It is an unnecessary bump in the road and would clearly make companies delay growth beyond this point for as long as possible.
What is the alternative?
Sharing equity isn’t meant to restrict growth nor reduce the value of a business. Quite the opposite.
There are already more than 10 different ways of distributing actual equity to employees, from HMRC-approved EMI schemes and EOTs to growth shares and unapproved options. We help UK founders do this every day of the week, as in recent years there has been a considerable uplift in understanding and the desire to share ownership with those who do or could help a company’s success, which is a powerful force for good.
We applaud Labour for encouraging companies to progress along the path of increasing equity ownership within their teams, but the suggested scheme is unworkable, undemocratic, and ultimately unfair to the workers themselves.
We hope that Labour will consult with experts and consider the alternatives before this damaging policy is implemented (should they win the election of course!).
WHAT TO DO WITH YOUR LIFE SAVINGS, RETIREMENT AND INSURANCE POLICIES WHEN EMIGRATING
By Renier Hugo, Alexander Forbes Certified Financial Planner
With South Africans increasingly opting to live abroad, a hot topic is the issue of what to do with your life savings, retirement, and insurance policies when emigrating.
New legislation, coming into effect in March 2020, means that South African tax residents living and working abroad will be required to consider whether they should emigrate from South Africa in order to avoid having to potentially account for tax in two countries.
A new term known as “financial emigration” has crept into people’s vocabulary. This is no different from the term “emigration” and the rules which attach when a person takes the steps to emigrate. One needs to understand the consequences of emigrating to another country on one’s financial products, such as long-term insurance policies, investments and pre-retirement money.
Life cover – You have the option of cancelling your life cover. Depending on the policy of the particular insurer, you might have the right to continue with the cover depending on whether the risk has changed for the insurer. You should take advice on this aspect. If you can it might be worthwhile to keep the current cover especially if you were underwritten when much younger or healthier. Your premiums will still have to be paid from a South African bank account. Some South African insurers currently sell life insurance that pays out in dollar or pounds; or life policies that pay out in any country abroad. These products may well be worth looking into before emigrating.
Disability and Income Protection – Care must be taken here. Assuming the policy can be continued, there may be certain exclusions within the terms and conditions when moving abroad.
Retirement Annuities – The usual restrictions of not being allowed to withdraw before age 55, as well as the one third maximum cash lump sum withdrawal, with the rest to buy a pension, does not apply. When officially emigrating, a member of an RA may withdraw the full capital amount.
Preservation Funds – The same applies to members of pension and provident preservation funds – a full withdrawal is allowed upon emigration.
Employer pension or provident funds – there is no restriction on withdrawal out of an employer pension or provident fund if a person decides to emigrate before normal retirement age.
Unit trusts and shares – regardless of whether you make the financial decision to sell these, there will be a tax consequence on emigration, so it is important to take advice.
Living Annuities – With regards to living annuities, you are unable to withdraw the capital even if you have formally emigrated. The income will continue to be paid out into a South African bank account, and from there the annuitant can choose to transfer it offshore.
Before making the big move abroad it is always wise to consult your financial adviser, as well as a South African emigration specialist who can analyse and give advice on your unique and personal circumstances. One should also obtain tax advice to understand the tax treatment of financial products following emigration.
THE END OF YEAR TAX CHECKS THAT COULD SAVE YOU THOUSANDS
Charlie Reading, Founder and MD of Efficient Portfolio
After HMRC’s tax return deadline at the end of January, it can be tempting to drop your guard, believing that your new tax bill is a long way away.
It’s true, you’ve got a whole year until the next bill is due. What most don’t consider, however, is that there is a range of checks that you can do reduce that bill significantly.
Astute investors make use of their tax-free allowances every year and save thousands of pounds in the process. With such massive savings on the line, it’s a strategy to certainly consider.
With that, here are some easy checks and tips from Charlie Reading, Founder and Managing Director of Efficient Portfolio chartered financial planners, that could start you on your way to a much leaner tax bill:
1. Maximise Your ISA Allowances
Good returns, flexibility, diversity and tax efficiency should be key components in your financial strategy, and the ISA helps to deliver all of these. Historically, ISAs have been at the cornerstone of tax-efficient saving and are often referred to as one of the essential steps in your strategy, as they can help your wealth grow without you being penalised by heavy tax charges. They are an incredibly useful way of saving, and, as such, it is generally encouraged that people take advantage of their benefits. However, the ISA allowance is offered on a ‘use it or lose it’ basis, so if you fail to maximise it, you can’t make up the funds later on.
Up until 5th April 2020, you can contribute up to £20,000 into an ISA, and a further £20,000 from 6th April 2020, thereby sheltering up to £40,000 per person, as long as you’re over 18.
2. Top Up Your Pension While You Still Can
At the time of writing, the highest level of State Pension you can receive is £129.20 a week, which is frankly a paltry sum to live on. That’s why saving for the future is so important. It might seem wise to enjoy life now and worry about retirement later, but you’d only be damaging your future quality of life.
Pensions are a highly tax-efficient way of saving and now offer a great deal of flexibility in retirement, as when you retire you can gain access to 25% of your pension pot as a tax-free lump sum, with the remainder taxed at your marginal rate.
The current pension annual allowance is set at £40,000, so if saving for your future is a priority, it is worth investigating which pension is right for you, sooner rather than later.
3. Protect Your Estate from Tax
Inheritance Tax (IHT) is a concern for people from all walks of life. If you are hoping to leave a legacy to your loved ones, the last thing you would want is for that legacy to be taxed at 40% and lost to the Government.
One simple way of combatting this is to consider using your annual IHT allowance. During your life, you are allowed to give away £3,000 per year without incurring any IHT charges upon your death. There are of course downsides to this, in that you lose all access and control over the money, but it may be a tax-efficient strategy to consider.
4. Don’t Overpay Your Capital Gains Tax
The final tax consideration at this time of year is Capital Gains Tax, which is also given on a ‘use it or lose it’ basis and is currently set at £12,000. The issue of Capital Gains Tax is most acute if you hold investments which have grown above your tax-free allowance.
To ensure you make the most of your Capital Gains Allowance, it is generally recommended to sell down a portion of your portfolio to realise the growth made, but only enough to maximise your allowance, is the most prudent strategy.
These funds can then be used to fund any outstanding allowance on your ISA, for example. The advantage of doing so is that by placing your money from a taxable to non-taxable environment you have the potential for further growth, and you benefit in the longer term by potentially reducing a future bill.
There’s plenty of time left before the taxman comes knocking once again, but there’s no better time than the present to start looking into how you can save you and your business thousands of pounds simply through tax allowances you might not have previously been aware of.
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