Chapter 33 Savings Related Share Option Schemes Flashcards
share options and considerations
An employee will make regular monthly savings into a designated bank account, known as an SAYE (save as you earn account). At the end of the contract period, the bank will add a terminal bonus to his savings. The employee will use this cash in the bank account to purchase shares in his employer company at a price that was fixed at the start of the contract.
Conditions – the employer company must register the scheme with HMRC. The shares must be ordinary shares, if the employee works for a subsidiary company the shares awarded can be in a parent or holding company. The company in which the shares are offered must not be controlled by another company. All employees must be eligible to participate (although employees with less than 5 years’ service can be excluded).
Share options – the employer company will grant an option to an employee with gives them the right to purchase shares at a specified price (the price must be at least 80% of the market value at the date of grant). The employee will make regular contributions to a bank account and will sign a contract with the bank to let the account run for either three or five years at the end of the contract a bonus is added to be used to purchase shares. The purchase price of the shares will be fixed at the date the option is granted.
the SAYE account, tax implications and employees leaving
The SAYE Account – the employee will agree a three or five year period. The amount of the bonus varies depending on when the SAYE contract was entered into. The bonus rates are linked to swap rates (which are borrowing rates between financial institutions). The bonus rate on contracts is currently nil. The bonus added to a SAYE contract is always tax free. SAYE accounts can only be taken out in conjunction with a savings related share option scheme. The maximum contribution is £500 per month and the minimum contribution is £5 per month, however the employee may increase that if they wish.
Tax Implications – there is never any tax or national insurance when the initial option is granted to the employee, the bonus at the end of the contract is also free of tax. When the employee exercises the option and purchases the shares with the cash, there is also no tax irrespective of what the shares are worth. The only tax to consider in respect of a savings related share option scheme will be capital gains tax when they sell the shares.
Employees leaving – if the employment terminates due to death, the option can be exercised within 12 months of death by the employees personal representatives. If the employment terminates due to injury, disability, redundancy or retirement of the employee, the option can be exercised within 6 months of the termination of employment. If an employee with a five year savings contract leaves the employment more than 3 years after the grant for reasons other than death, injury, redundancy or retirement the scheme rules permit they have 6 months to exercise the options within 6 months of leaving. Otherwise the employee needs to be in employment at the end of the contract period to exercise the options. If not, they forfeit the right to purchase the shares. If an employee leaves the company before the end of the SAYE contract that employee can continue making contributions into the SAYE scheme until the contract date, at the end of the contract they still receive the bonus but is not able to use the money to purchase shares. There is no requirement to still making contribution though and they can draw the cash out of the account. Any interest credited to a SAYE account is tax-free and not brought into the tax computation.
