Chapter 32 Share Incentive Plans Flashcards
operation of a SIP
Initially an employee can receive free shares with no income tax or NIC consequences. Free shares mean the employee receives them from his employer completely free. The SIP enables employees to purchase new shares in their employer company and obtain income tax relief on the purchase, this is known as partnership shares. If an employee purchases partnership shares under a SIP, they may be entitled to receive additional free shares, these are known as matching shares. Finally, a SIP enables employees to reinvest their dividends in order to purchase additional shares in the company, these are known as dividend shares
Operation of a SIP – SIPs are operated by quoted UK company, the company will establish a UK resident trust and transfer cash into that trust. The trustees will use the money to acquire shares in the company. On acquiring shares the trust will award shares to employees, on award of shares the ownership of the shares does not pass to the employee. There is never a tax charge at the point that the shares are awarded to employees, but there may be income tax and NIC implications when the employee withdraws the shares from the plan in the future.
Considerations – the company must register with the scheme to operate a SIP. The company’s shares must be listed on the stock exchange. All of the employees of the company must be invited to participate on the scheme (you can exclude employees with less than 18 months service). The employees must be offered shares on similar terms.
free shares and partnership shares
Free Shares – an employer can award up to £3,600 worth of free shares per annum. This can be based on performance-related criteria. These will normally remain within the plan for a minimum of three years, the employer will set the holding period. There is never a charge to income tax or NIC when the shares are originally awarded. If an employee calls for the shares within three years there will be an income tax charge on the market value of the shares at the date they are withdrawn from the plan, this will count as employment income for tax purposes. If the shares are readily convertible assets there will be an NIC charge.
If the shares are withdrawn from the plan between three and five years, the income tax charge will be on the lower of the market value of the shares at initial allocation and the market value of the shares at the date of withdrawal. If shares withdrawn after 5 years, there is no income tax charge or NIC.
Partnership shares – an employee can buy up to £1,800 worth of partnership shares every year. the amount that can be deducted from an employee’s salary cannot exceed 10% of their salary. The employee will surrender salary to purchase the shares. The shares can be withdrawn at any time. They are taxed the same as free shares.
matching shares and dividend shares
Matching shares – an employer can match any partnership shares bought by employees, by offering two additional free shares for every one partnership share purchased. The plan must specify a holding period for them of between 3 and 5 years. When the shares are withdrawn, they are taxed the same as free shares.
Dividend shares – if an employee receives dividends on his shares whilst they remain in the plan, they can use the cash to buy dividend shares. The dividends used to purchase the shares are free of tax and are omitted from the tax computation. The holding period is 3 years. If they are withdrawn within 3 years the original dividend used is fully taxable, if withdrawn after 3 years there is no income tax or NIC.
Other points – on termination of an employee’s employment any shares awarded will be removed from the plan. Any income tax and NIC charges depend on the length of time the shares are in the plan. However, if employment is terminated due to injury, retirement, redundancy or death there is no charge from withdrawal of the plan. If the necessary provision is contained in the plan, free or matching shares may be subject to forfeiture, only if the employee resigns.
