Chapter 15: Employee Share Schemes Flashcards
How is an employee share scheme defined in SA s1166?
A scheme for encouraging or facilitating the holding of shares or debentures in the company by or for the benefit of:
- bona fide employees or former employees of the company or group
- the spouses, civil partners, surviving spouses, or former employees.
What is an all employee share scheme?
A scheme in which all (or substantially all) employees may participate.
What is a discretionary employee share scheme?
A scheme which can only be accessed by select employees, usually defined by seniority or service length.
What is a “bad” or “voluntary” leaver?
An employee who leaves the company, and whose right to any benefit under a share scheme is limited.
What is meant by “dilution”?
The shares used in employee share schemes are usually new shares, and therefore dilutes the existing shareholding.
What is meant by “exercise”?
The process by which participants take up their right to convert an option into a share.
What is meant by the “exercise period”?
The window of opportunity in which participants may exercise their option.
What is meant by the “exercise price”?
The price at which a share option may be exercised.
What is meant by a “grant”?
The process of awarding an employee with an option.
What is meant by an “in the money” option?
When the market value of a share is greater than the exercise value,
What is the opposite of an “in the money” option?
An underwater option.
What is a HMRC approved share scheme?
A scheme designed and administered according to HMRC rules.
What is meant by a “lapse”?
Once a benefit is no longer available (i.e. expiry of an option), it is considered to have lapsed.
What is an “option”?
The right granted by a company giving the participant in the scheme an opportunity to purchase shares at a fixed price.
What is meant by “performance condition”?
Conditions that must be met prior to the option being exercised.
What is meant by a “scaleback”?
If an employee applies for more options than are available, their application will be reduced the amount available.
What is meant by “scheme rules”?
The rules which govern an employee share scheme.
What is meant by “vest”?
A minimum waiting period applies prior to which the option becomes available to the employee - the point at which is becomes available is the vesting point.
Name 7 employee share schemes.
1 Share incentive plan (SIP) 2 Savings-related scheme (Sharesave) 3 Profit sharing schemes 4 Company share options plans (CSOP) 5 Enterprise management incentives 6 Long term incentive plans (LTIP) 7 Employee shareholder schemes
What are the key types of shares that can be offered under a share incentive plan? (SIP)
1 Free shares (up to £3600 annually)
2 Partnership shares (up to £1800 annually)
3 Matching shares (to match partnership shares)
Are SIPs HMRC approved schemes?
Yes, although the concept of a SIP is somewhat flexible allowing some latitude for the company to create a plan for its circumstances.
What HMRC rules are set around free shares in a SIP?
- annual limit of £3600
- distribution must be based on individual, divisional or corporate targets
- must not focus on highly paid individuals
- if employee leaves the company within three years, the shares can be forfeited.
- shares are free of tax and NIC
What HMRC rules are set around partnership shares in a SIP?
- annual limit of £1800 or 10% salary (whichever is lowest)
- there must be a minimum saving level (but not higher than £120 a year)
- partnership shares a deducted pre-tax giving a tax saving
- accumulated savings over a 12-month period can be used to purchase shares
What HMRC rules are set around matching shares in a SIP?
- free shares given by the company to match partnership shares
- ration must not exceed 2:1 of matching:partnership
- matching must be offered on the same term to all employees
- if an employee leaves within 3 years, the company can forfeit the shares.
For how long must the different types of shares be held in a plan for a SIP?
Partnership shares can be taken out immediately.
Matching and free shares can be taken between 3 and 5 years.
What are the tax benefits of a SIP?
Employees do not pay tax on free, matching or partnership shares, provided they are kept in the plan for at least 3 years.
Companies receive corporation tax relief for their costs in setting up the scheme.
What are the key features of a Sharesave (savings-related/SAYE) scheme?
- all-employee scheme
- employees save up to £500 per month through a savings contract for 3 or 5 years
- savings are kept at a bank or buildings society
- employees receive a bonus at the end of the saving period.
- tax exemptions are available when the employee exercises the option.
- HMRC approved
What discount can the company offer to employees on share options under a Sharesave scheme?
Up to 20% below market price
How much may an employee save each month under a Sharesave scheme?
Between £5 and £500.
Following the end of the savings period in a Sharesave scheme, how long do employees have to exercise their option?
Usually six months.
In the event of death of an employee who is a Sharesave participant, how long does the personal representative have the exercise the option?
12 months from the date of death.