Share Incentive Schemes Kelso : Rennie Welch

Share Incentive Schemes

When shares are gifted to employees from an employer company, there is usually a tax charge at the date of the gift if they are transferred at a nil or reduced cost.

However, HMRC approved share schemes are available and these can be a good way of giving or granting shares in the employer company to employees, with tax and National Insurance advantages available, if specific conditions are satisfied.

When an employer grants a share option to an employee, they effectively have the right to acquire shares in the employer company within a specific period of time. The shares are not physically passed to the employee until he “exercises” his share option and takes up his right to buy the shares at market value in the company. Once this is done, the employee will acquire the shares in the employer company.

There are three main reasons why an employee will set up a share incentive scheme for their employees. The shares may be awarded to employees as remuneration of their services and may be paid as a bonus in the form of these shares rather than cash. Secondly, a company may try to improve the performance of their employees by offering the incentive of these shares. They may set targets for the employee to reach and if these are achieved, they may receive the right to buy shares. Finally, a company may set up a scheme in order to retain staff, as usually the shares need to be held for a certain period of time, usually three years, before the employee can “exercise” his options to purchase them.

There are four main types of tax advantaged share schemes available to employers. These are Share Incentive Plans (SIPs), “Savings Related” Share Option Schemes, Company Share Option Plans and Enterprise Management Incentives (EMIs).

Share Incentive Plans (SIPs)

  • Employees can receive or purchase three separate types of shares in the employer company. These are “Free Shares”, “Partnership Shares” and “Matching Shares”. There are limits on the amount of shares that can be received or purchased per annum. Any dividends received from shares still held within the plan can be reinvested to purchase further shares.
  • All employees in the company must be invited to participate in the scheme and they must be offered shares on similar terms.
  • The shares may need to be held for a certain period of time before they are withdrawn from the plan, in order to avoid income tax or National Insurance contribution (NIC) charges on the market value of the shares. If the shares are eventually sold, any increase in the value of these shares from the withdrawal date to the date of the sale will be chargeable to capital gains tax.
  • Generally used by listed companies.

“Savings Related” Share Option Schemes

  • The employee will make monthly contributions into a Save As You Earn (SAYE) account over a designated contract period. At the end of the contract period, a terminal bonus will be added to the savings. This cash will then be used to purchase shares in the employer company at a fixed price which is agreed at the start of the contract period.
  • All employees of the company must be eligible to participate in the scheme, although the employer can exclude employees with less than 5 years’ service.
  • There are generally no income tax or NIC charges in relation to the scheme and often the only tax payable is capital gains tax when the shares are eventually sold by the employee.
  • Mainly used by large companies.

Company Share Option Plans

  • The employee is given the right to buy shares in the company at a fixed price within a specific period of time. The price that is paid for the shares must not be less than the market value of the shares when they are granted.
  • The shares that are acquired must be ordinary shares. The plan must also be registered with HMRC and the company must satisfy certain conditions.
  • The company can invite selected full-time directors and full or part-time employees to participate in the company share option plan. If an individual holds more than 30% of the ordinary share capital, they will not be able to participate. Part-time directors working for less than 25 hours per week are also unable to participate.
  • There will be no income tax or NIC charges if the employee “exercises” their option between 3 and 10 years from the date the option is granted. If the “exercise” takes place outside of this period, a charge to income tax and NIC may arise and specific rules apply as to how this charge is calculated. If there is no income tax or NIC charges, the only tax that may arise is capital gains tax when the shares are eventually sold.

Enterprise Management Incentives (EMIs)

  • The employee is given the right to buy shares in the company at a fixed price within a specific period of time. The price that is paid for the shares must not be less than the market value of the shares when they are granted.
  • The company can only grant options if certain conditions are met and the company must be a trading company and carry on a qualifying trade.
  • The company can invite selected full-time employees (at least 25 hours per week) to participate in the scheme but if an individual holds more than 30% of the ordinary share capital, they will not be able to participate.
  • There will be no income tax or NIC charges if the employee “exercises” their option within 10 years, if no discount was offered on he shares at the date of the grant. Capital gains tax may apply when the individual disposes of the shares.
  • Generally more suitable for smaller trading companies and these can have significant tax advantages for employees whilst encouraging staff retention for the employer.

These notes have been produced for information only. Rennie Welch LLP accepts no liability on the basis of this article and detailed advice should be sought before entering into any transaction. If you require assistance in connection with any accounting or taxation matter, please contact either Mairi Drummond or Cameron Fisher by email at mairi.drummond@renniewelch.co.uk or cameron.fisher@renniewelch.co.uk.

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