Share Incentive Plans (“SIPs”) Print
This scheme must be available to all eligible UK resident employees, including those employees who hold a material interest in the company. The scheme must provide for a minimum service requirement not exceeding 18 months. An individual is regarded as holding a material interest if he, and/or certain of his associates beneficially own, or control more than 25% of the ordinary share capital in the company.
Employees are able to acquire shares in three different ways:
Employers may gift shares up to the value of £3,600 in any tax year to each employee, and the employer has the ability to decide how many shares are awarded to each employee up to this limit. The employee must agree to the shares being held by the trustees of the scheme for a term known as the holding period. This must not be less than 3 years, or longer than 5 years.
If the shares leave the plan after 5 years, there is no amount charged to tax as income.
Where the shares are withdrawn from the plan within 5 years, but after 3 years, the amount charged to tax as income is the lower of the market value of the shares when they leave the plan, or the market value at the date the shares were awarded to the employee.
If the shares are withdrawn within the first 3 years following the award, the amount charged to tax as income is the market value of the shares on the date they leave the plan.
Here, employees are able to buy shares out of their pre-tax salary up to a limit of £1,800 per year, and the amount of the purchase consideration is deducted from the individual’s salary. The maximum amount that may be deducted must not exceed 10% of the employee’s salary. The plan must also set a minimum amount for the monthly deductions, and this must not exceed £10. The amounts deducted from the salary must be paid over to the trustees. The trustees then hold the funds on behalf of the employees in a bank or building society account until such time as the partnership shares are acquired. If interest is earned on the funds whilst being held by the trustees they must account to the employees for the interest. An employee has the right to stop, or re-start deductions, although the scheme may provide for only one re-start per period. Any deductions missed may not be made up at a later date, and are lost.
Where the scheme provides for an accumulation period this must not be longer than 12 months. The partnership agreement must state how the number of shares awarded to each employee is to be determined, by reference to the market value of the shares:
(i) At the beginning of the accumulation period;
(ii) On the acquisition date, or
(iii) The lower of (i) or (ii).
Employers are able to match partnership shares by giving employees up to 2 free shares for each partnership share bought.
Initially the shares are all held in a trust, similar to an employee share incentive scheme trust, and normally the free shares and matching shares must remain in the trust for a minimum period of 3 years. Employees are able to withdraw partnership shares out of the plan at any time. Shares must be withdrawn from the plan if the employee leaves the employment, and some employees may lose their free and matching shares if they leave the employment within 3 years of being allocated the shares. If the shares are kept within the plan for 5 years, no income tax, or National Insurance Contributions (“NIC”) charge arises on the withdrawal, and Capital Gains Tax (“CGT”) will only be payable on the increase in value of the shares between withdrawal and sale. If the shares are withdrawn after 3 years, but before 5, the employee is liable to pay tax and NIC on the lower of the initial value of the shares when awarded, and their market value on the date they leave the plan.
Dividends paid on the shares whilst they remain in the plan will be tax-free provided that the dividends are reinvested into additional shares in the company, and do not leave the trust for 3 years. The requirement for the whole of the dividend to be reinvested has been withdrawn, and the SIP may now specify what proportion of a dividend has to be reinvested.
Employers are entitled to a deduction for the cost of setting up, and running the plan as well as for the market value of any free or matching shares awarded to employees within the plan.
This scheme is ideally suited to quoted companies with large numbers of employees, but its use is not restricted to them, and other companies wishing to incentivise their employees may find this scheme attractive.