Long Term Incentive Plans

Usually, companies implement an LTIP, Long Term Incentive Plan, for senior executives whose planned awards fall outside of the permitted maximum of an HMRC approved share plan.

Employee Share Ownership  Trusts are being increasingly used by the owners of a business to create a sale which is 100% free of capital gains tax and approved by HMRC. Employee Benefit Trusts can be created also where there is commonly  a crossover with Long Term Incentive Plans.

A sale to an employee benefit trust provides many of the benefits a seller could receive through a third party sale but there a incremental benefits, less disruption and confidentiality. The tax break for the sellers are substantial – the shares can be sold at full market value without the sellers incurring any liability for Capital Gains Tax (“CGT). It is possible to seek advance clearance from HMRC as to the tax position on sale of the business for certainty.

LTIP – How to achieve the best plan

The basic idea behind a LTIP is that participants receive share options or shares if they satisfy certain performance criteria over time. Sometimes, the LTIP participants have to invest a proportion of salary or cash bonus towards the acquisition of shares.

With LTIP’s an Employee Benefit Trust is normally set up and the directors select the participants, performance criteria, required share retention period and terms. Tax planning is usually part of the design of the plan and we are highly experienced at this.

Performance criteria under an LTIP

The pay out from the LTIP depends on performance targets linked to the company’s growth metrics.  Increasingly performance targets include soft or behavioural components to promote the culture of the company.

LTIP malus clauses

Financial misconduct is often discovered after the fact. Those involved might have left with their pockets full or they may expect an LTIP pay out after the end of the retention period.

The employer company can recover the award under an LTIP if permitted by the LTIP rules, under:

• Claw back provisions – the participant will have to repay if the performance of the business is not as good as initially reported;
• Malus provision – the LTIP award can be adjusted downwards to reflect a change in circumstances.

How are LTIP’s taxed?

Taxation of LTIPs depends on the nature of the award. LTIPs can be taxed as:

• A bonus paid in shares and taxed as income from employment;
• A share option – depending on whether the option is approved (CSOP), or unapproved, capital treatment may be available.

LTIP : holding shares in an Employee Benefit Trust

Most companies which operate LTIPs hold LTIP shares via an Employee Benefit Trust (EBT). An EBT provides an internal market for shares which makes the LTIP very attractive for employees.