Share Incentive Plan (Formerly Employee Share Ownership Plans)

Geoff Taylor

What is a Share Incentive Plan?

It is a Plan established by a company providing for:

a. ‘Free shares’ to be apportioned to employees without payment
b. ‘Partnership shares’ to be acquired on behalf of employees out of sums deducted from their salary
c. ‘Matching shares’ to be appropriated without payment to employees in proportion to the partnership shares acquired.

Companies can implement plans providing any or all of the above types of shares.

The HM Revenue & Customs must approve the Plan.

The main advantages of a Share Incentive Plan

A motivational tool to attract/retain key employees
Tax benefits and payroll savings for employers
Shares may be awarded by reference to performance
Employees able to buy partnership shares out of pre-tax salary, free of Income Tax and National Insurance
Employees who keep their shares in the plan for five years pay no Income Tax or National Insurance on those shares

Corporation Tax

Deductions in computing taxable profits for:

The costs of setting up and running the plan
The market value of free and matching shares awarded
The gross salary allocated by employees to buy partnership shares

Income Tax and National Insurance contributions

No tax on award of shares
If shares are withdrawn after less than 3 years, tax and NIC is charged on the market value of the shares when they leave the plan
If shares are withdrawn after more than 3 years but less than 5 years, tax and NIC is charged on the lower of
The market value of the shares
The market value of the shares when they leave the plan
Tax & NIC is chargeable on partnership share money returned to the employee
No charge to tax or NIC as a result of redundancy/retirement/death
Dividends reinvested or retained for reinvestment are not subject to income tax

Capital Gains Tax

Gains accruing to trustees are not chargeable providing awarded to employees within
Two years if readily convertible assets
Five years if not readily convertible assets
No chargeable gain on shares ceasing to be subject to the plan
Rollover relief for gains arising on disposals to plan trustees

Types of Shares

Shares that may be used

Must be ordinary share capital of the same company
Must be fully paid up and not redeemable (exemption available for co-operatives)
Must not be subject to any restrictions other than:
Holding period
Those affecting all ordinary shares
Voting rights
Provision for forfeiture
Pre-emption conditions

Free Shares

An employee may not receive more than £3,000 of free shares in any tax year
Award may be made by reference to performance
Performance measures must be based on business results or other objective criteria
Employees must be notified of the performance targets and measures
Some or all of the shares may be awarded by reference to performance
The company must specify a holding period of between 3 and 5 years during which the free shares remain in the hands of the trustees.

Partnership Shares

The deductions from an employee’s salary must not exceed
£1,500 per annum and
10% of salary
The company may specify lower limits
The company may specify a minimum deduction of no greater than £10
Partnership share money must be paid to the trustees as soon as is practicable
The trustees must purchase the shares within 30 days of the end of the accumulation period (maximum 12 months)

Matching Shares

Shares of the same class and carrying the same rights as partnership shares
Awarded to all employees on the same basis
Ration of matching shares to partnership shares must not exceed 2:1

Dividend Shares

Dividends of up to £1,500 per tax year may be reinvested to acquire ‘dividend shares’

Miscellaneous Provisions

The Trustees

Resident in the UK
Responsibilities include:
Acquiring shares and appropriating to employees
Applying partnership money in acquiring shares on behalf of the employees

General Requirements

Every employee who is eligible to participate in the plan is invited to do so
Employees must be invited to participate on the same terms
No feature of the plan must be likely to have the effect of conferring benefits wholly or mainly on directors or higher paid employees

Eligibility of Individuals

An employee of the company or, in the case of a group plan, of a participating company
An individual who does not have a material interest in the company
An individual not participating in another approved share scheme established by the company

Set-up and Running Costs

This will depend up on the size and complexity of the scheme but we would expect our fees to be in the region of £6,500 to £12,000. We will provide a fixed fee quote in advance to include scheme design, drafting to the Trust Deed and obtaining HM Revenue & Customs approval.

The Plan’s annual running costs, in terms of four fees, will also depend up on the size and complexity of the scheme, but typically will be in the region of £1,000 to £3,000.

Main features of a typical plan

Employees can buy ‘partnership shares’ from their gross monthly salary or weekly wages, free of tax and NICs at that point – maximum salary allocation of £1,500 each year with an earnings cap of 10% minimum contribution £10 a month
Employers can give up to £3,000 of free shares to all employees, tax and NICs free at that point
Employers can match the ‘partnership shares’ with up to 2 free shares for each partnership share bought by the employee – known as ‘matching shares’ – also tax and NICs free at that point
Employers have greater flexibility in the way that they reward employees with free shares in return for reaching performance targets; for example allowing personal, team, or divisional performance to be rewarded
Employees will not normally be able to withdraw free and matching shares from the plan for 3 years
Free and matching shares will be completely free of tax and NICs if they have been held in the plan for 5 years, and will be taxable on their initial value between years 3 and 5
Partnership shares will be subject to tax and NICs on their market value if employees take them out of the plan in the first 3 years
Partnership shares held in the plan after the 3 year point will have tax advantages, with shares becoming completely free of tax and NICs after 5 years in the plan
Any gain in the value of any shares while they are in the plan will be tax and NICs free
When shares come out of the plan, their market value at that date will form the base cost for any capital gain arising on any subsequent sales
Employees have to take their shares out of the plan when they leave employment
Free and matching shares may be subject to forfeiture if the employee leaves within 3 years. ‘Good leavers’ such as those who have left through redundancy, retirement or death will receive favourable tax treatment and their plan shares will not be subject to forfeiture
Dividends paid on the shares in the plan will be tax-free, up to annual limits, provided they are used to acquire additional shares in the company
Companies will get a deduction in computing their taxable profits for the costs of setting up and running the plan, and the value of shares used in the plan
Companies can provide that shares must be offered for sale when employees leave; companies can offer shares with no voting rights; companies, but typically those with fewer shares, can offer shares subject to forfeiture. These measures are specifically to encourage smaller companies to participate.