The Share Incentive Plan is a qualifying employee share ownership plan which must be operated on an all-employee basis.
The key features of the plan are:
- up to £3,600 of “free shares” can be awarded to employees tax free each year;
- employees can invest up to £1,800 a year of pre-tax and pre-NIC salary in “partnership shares”; and
- where an employee invests in partnership shares, the employer can provide additional tax free shares on a matching basis in any ratio of up to 2:1 (“matching shares”).
The shares can be withdrawn from the plan tax free after 5 years or earlier in certain circumstances.
All UK resident employees are eligible to participate in the plan. The company may impose a qualifying period of service. The period may be up to 18 months (or 6 months for partnership / matching shares where participants’ savings are “accumulated” over a period of up to 12 months instead of being used to purchase partnership shares monthly).
Every employee who is invited to participate must be invited to do so on similar terms (although there is an exception for the award of free shares on the basis of performance).
Special purpose trust
All shares acquired through the plan must normally be held in a special UK resident trust. In order for employees to benefit from the maximum tax advantages, they must leave shares in the trust for at least five years.
Broadly speaking, shares must be fully paid-up, not redeemable ordinary shares in a company:
- which is independent; or
- listed on a “recognised stock exchange” (which includes for these purposes the London Stock Exchange, New York Stock Exchange, NASDAQ, the Australian Stock Exchange, Euronext Paris etc., but not AIM); or
- which is under the control of a company whose shares are listed on a recognised stock exchange.
Shares awarded after 17 July 2013 may be subject to any restrictions (subject to certain protections for partnership shares outlined below).
A company can give up to £3,600 worth of free shares per year to employees. Performance conditions relating to whether or not shares are awarded (or as to the number that are awarded) may be imposed. The plan may provide that bad leavers forfeit free shares if they leave within the first three years. The plan may permit participants to withdraw free shares voluntarily between three and five years.
Partnership shares may be acquired with a single lump sum deduction (e.g. from salary or bonuses) or by way of regular monthly deductions. Employees can deduct a maximum of £1,800 per year (equating to £150 per month) or 10% of salary (if lower). The partnership share money is held by the trust on behalf of the employee until it is used to purchase partnership shares.
Companies can allow deductions to be used to buy partnership shares monthly or the savings can be retained by the trustee over periods of up to 12 months (known as “accumulation periods”) and used to buy shares at the end of the period. If an accumulation period is operated, the shares must be sold to participants at the market value of the shares at the beginning or end of the accumulation period (or the lower of the two) depending on which is specified in the partnership agreement.
Participants must be able to withdraw from the plan, in which case all money held on their behalf must be repaid. Participants may withdraw partnership shares from the plan at any time but there may be a tax charge if they do so. The plan rules may permit partnership shares to be forfeited on cessation of employment but in that case the shares must be purchased for an amount equal to the salary used to purchase the shares in the first place or, if lower, their market value at the time of forfeiture.
If the employer offers matching shares, they must be awarded on the same day as the partnership shares to all participants on the same basis. The partnership share agreement must specify the ratio of matching to partnership shares and the circumstances and manner in which the ratio may change. The ratio must not exceed two matching shares for every partnership share. The plan may permit participants to withdraw matching shares at any time after three years and it may require matching shares to be forfeited on the withdrawal or forfeiture of partnership shares in the first three years.
Dividends received on shares held in the trust are passed on to participants by the plan trustee. The plan may, however, permit participants to use dividends to acquire further shares (known as “dividend shares”). Dividend shares must be held in the plan for three years.
For more detailed guidance on Growth Shares please click here.