CH 29 - Share Incentive Plans (SIPs)

Question 1

How Share Incentive Plans are administered? Also state 2 conditions for avilability of SIP

Answer 1

• A trust is established which acquires shares in the employer company.
• These shares are then awarded to employees but continue to be held on trust.
• The company must be quoted or not controlled by another company or under the control of a listed company.
• All employees must be offered shares on similar terms and all full-time and part-time employees must be invited to join, although those with less than 18 months’ service could be excluded.

Question 2

What types of shares can be awared from a SIP?

Answer 2

• Employees can be awarded up to £3,600 worth of free shares per annum.
• Employees can buy partnership shares up to the lower of £1,800 or 10% of salary plus bonus.
• The employer could give up to two further matching shares to the employee for each partnership share acquired.
• Any dividends from plan shares can be reinvested to acquire dividend shares.
• Salary surrendered to buy partnership shares is deducted from gross salary before income tax deducted under PAYE and NICs are calculated.

Question 3

How are a charge to income tax arrises if the shares (free/partnership/matching) are widrawn, list type of shares at withdrawal and rulles for <3y, 3-5 years, >5 years.

4x

Answer 3

FREE SHARES & Matchin Shares;
* < 3y Income tax on MV at withdrawal
* 3-5y based on lower of: MV at allocation & MV at withdrawal
* > 5y No Income tax

PARTNERSHIP SHARES;
* < 3y Income tax on MV at withdrawal
* 3-5y lower of: Amount used to purchase shares & MV at withdrawal
* > 5y No Income tax

DIVIDEND SHARES;
* < 3y Dividend used to buy shares becomes taxable
* 3-5y No income Tax
* > 5y No income Tax

Question 4

When PAYE & Class 1NIC applies on withdrawal of SIP shares?

Answer 4

Where there is an income tax charge, PAYE and Class 1 NICs will apply if the shares are readily convertible assets. (ie quoted shares)

There is never an NICs charge in respect of the withdrawal of dividend shares.

Question 5

When and what tax charge arrises on a withdrawal from the plan (SIP)?

Answer 5

CGT arrrises on difference between;
- the value of the shares at the date they are witdrawn from the plan (base cost); and
- value at the date of sale

Sale proceeds £
Less: Market value at withdrawal (£)
Capital gain £

The rules dealing with tax charges and PAYE deductions on SIP shares are contained in ITEPA 2003, ss.488–515. The rules regarding the operation and administration of a SIP are provided in ITEPA 2003, Sch 2.