Share Incentive Plan

The Inland Revenue Share Incentive Plan is the most tax efficient employee share plan to be introduced by a UK government. The Share Incentive Plan is intended to replace the Inland Revenue Profit Sharing Scheme which will be phased out at the end of 2002.

The Share Incentive Plan involves the setting up of a Trust that will acquire shares and allocate them to participants in accordance with the rules of the Share Incentive Plan.

The Share Incentive Plan comprises three main parts under which Free Shares, Partnership Shares and Matching Shares may be awarded. Companies may choose which parts to adopt.

Free Shares : These are shares given free of charge to each employee subject to a maximum value of £3000 in any tax year. They are normally subject to a holding period of between 3 years and 5 years.

Partnership Shares : These are shares with a value, at the acquisition date, of up to £1500 or 10% of salary in the tax year (whichever is lower) bought by the participating employee with pre-tax salary (i.e. before tax and National Insurance Contributions).

Matching Shares : These are free shares given by employers for every partnership share in the company that an employee purchases. The maximum ratio is 2 Matching Shares to 1 Partnership Share.

Dividend Shares : These shares are acquired through the re-investment of dividends received in respect of shares held in the Share Incentive Plan, subject to a maximum value of £1500 per annum.

Tax Treatment

The income tax treatment will depend on the length of time the shares remain in the Share Incentive Plan.

Broadly shares held:

between 1 and 3 years

- are chargeable to income tax and (in appropriate cases) NICs on the market value of the shares on the date they are removed from the Share Incentive Plan.

between 3 and 5 years

- are chargeable to income tax and (in appropriate cases) NICS on the lower of the:
(i) market value at the date of award; and
(ii) market value at the date they are removed from the Share Incentive Plan.

more than 5 years

- no income tax or NICs is payable.

Likewise, the capital gains treatment will depend on the length of participation in the Share Incentive Plan.

No capital gains tax (CGT) is chargeable on increases in the value of the shares while the shares are held in the Share Incentive Plan.
No CGT is chargeable on shares held for 5 years and sold immediately on removal from the Share Incentive Plan.
Shares acquired under the Share Incentive Plan will attract Business Taper relief on gains which accrue after removal from the Share Incentive Plan
Companies are entitled to a corporation tax deduction in respect of the costs of establishment, contributions and administration of the Share Incentive Plan.

Benefits

Aligns employees' interest with that of shareholders.
Possible financial rewards due to income and CGT.
Employees not within the UK can fully participate in the plan.
Can stimulate employees' performance.
Consequential increases in productivity.
Encourages employees to take a longer-term interest in their company.
Certain awards can be made subject to performance criteria.

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This briefing has been prepared for general guidance only and should not be acted upon without specific advice. Please contact us if you need further information.