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London solicitors specialising in the law relating to employment, partnerships/LLPs and company commercial
How can free shares, partnership shares and matching shares be used
Taxation treatment for employees and tax savings for employers
Please view our pages on EMI options, unapproved options, SAYE employee share schemes and company share option plans for further information relating to different types of employee share schemes.
An HMRC approved employee share plan means HMRC have approved the employee share plan in advance of implementation. HMRC will approve a number of different varieties of employee share schemes including the SIP - employee share incentive plan.
On the whole SIPS are suitable for employers with at least 50+ UK employees wishing to provide incentives the entire workforce and are usually (but not necessarily) implemented by quoted companies in the UK or abroad.
A UK trust must be used to hold employees' assets (cash/shares). SIPS offer a variety of alternatives for employers since they are able to choose between a flexible combination of Free Shares, Partnership Shares or Matching Shares.
SIPs can be operated over shares in a UK company or over shares of a foreign company with UK employees.
Companies must offer all employees whose remuneration is taxable in the UK the opportunity to participate in the plan whether they work full or part time. Companies can require employees to have completed a minimum qualifying period of employment before they can participate, but that period must not be more than 18 months.
Where an employee withdraws the shares within three years of the date of the award, he will have to pay income tax and NICs on the market value of the shares at the date of leaving. If the shares are withdrawn between three and five years after they have been awarded, an employee will have to pay an income tax charge and NICs on the lesser of the market value of the shares when they were first awarded and the market value of the shares on the date of leaving. Employees not wanting to pay income tax or NICs on the shares must keep them in the plan for five years.
No Capital Gains Tax (CGT) is payable when shares are taken out of the plan. CGT only becomes payable if employees choose to keep shares when they come out of a plan and sell them later.
Employees can allocate pre-tax salary to the purchase of partnership shares. Employees who withdraw partnership shares from a plan before they have been held in the plan for five years may have to pay tax and NICs in respect of those shares. The amount of any income tax charge will reduce the longer the partnership shares are held in the plan. Once the shares have been held in the plan for at least five years employees will be able to remove the shares from a plan at any time without paying income tax.
The treatment of partnership shares with respect to CGT is the same as Free Shares and Matching Shares.
Leavers
The trust must transfer plan shares to those employees who leave employment for whatever reason. However, if the shares have been held in the plan for at least five years, there is no income tax or NICs to pay. Where employment ends before the shares have been held for three years, the employees will have to pay income tax and national insurance depending on the circumstances of leaving.
Employers operating the SIP will be entitled to corporation tax relief on the expense of running the SIP, as a deduction in computing their taxable trading profits or as expenses of management.
An employer will have to operate PAYE and account for NICs where an income tax charge arises under the terms of the plan and the plan shares can be readily converted into cash.
Companies may, if they wish, provide in the plan rules that Free Shares and/or Matching Shares will be forfeited if the employee leaves the relevant employment other than for a specified reason such as disability or redundancy. Matching Shares can also be subject to forfeiture if the corresponding partnership shares are withdrawn within three years of purchase. However, Partnership Shares themselves cannot be subject to forfeiture.
The plan also allows employers to offer dividend reinvestment for employees with shares in a plan. Dividend shares will be subject to a holding period of three years during which employees will not be permitted to sell them, unless they leave the relevant employment. Where employees leave the relevant employment during the holding period, their dividend shares will be transferred out of the plan and income tax will be payable on the original dividend as if it had been received in the normal way but in the year employment ceased.
Once the three year holding period has expired the dividend shares can be withdrawn tax free. If they are sold immediately there will be no CGT. Alternatively, these can be held in the plan until the participant's employment ceases.
The shares used in a plan must be either in a company listed on a recognised stock exchange or in its subsidiary, or shares in a company that is not controlled by another company.
The shares in a plan must also be fully paid up ordinary shares and not redeemable.
Before implementing an employee share scheme it is necessary to review the share capital requirements and frequently the articles require amendment to cater for the operation of an employee share scheme.
There are regulatory consents to consider in the form of shareholder approval and institutional approval. The ABI and various investment exchanges have implemented special rules governing employee share schemes and option plans which do require consideration as part of the implementation process.
The process of obtaining HM Revenue and Customs approval to the scheme does create a time line of up to two months in practice.
Share incentive plans SIPs offer many features and can be used in a variety of ways. Please do call us if you have any queries.
This paper is designed to provide a summary of the issues addressed. Therefore, it is not intended as a detailed commentary on the relevant law and any comments made should not be acted upon without first taking specific legal advice.