Share Incentive Plans (SIPs)
What are Share Incentive Plans?
A Share Incentive Plan or SIP allows companies to offer all their employees shares on flexible and tax-advantaged terms. All employees must be invited to participate (subject to a qualifying service period set by the company of up to 18 months).
There are a number of ways shares can be offered under a SIP. Employees can:
- Accept an offer of shares (free of charge) with a market value of up to £3,600 per tax year (“Free Shares”).
- Purchase shares in the plan company using up to £1,800 of (pre-tax) earnings per tax year (“Partnership Shares”); and/or
- Accept an appropriation of shares (free of charge) on the basis, which must be the same for all qualifying employees, of up to 2 free shares for every 1 Partnership Share acquired out of gross salary (“Matching Shares”).
Dividends paid on SIP shares can also be reinvested free of tax.
It is possible to use all these methods together, although not many companies do. The limit on the value of shares may also be capped by the company. It is worth bearing in mind that research by ifs Proshare shows that even a small offering of Matching Shares can significantly increase the takeup by employees of invitations to invest in Partnership Shares.
As long as shares are held in the SIP, they must be held by a plan trustee on behalf of employees in a SIP trust for this purpose.
As part of government efforts to encourage employee ownership, the tax advantages attaching to SIPs are:
- No income tax on the award of Free or Matching Shares
- Partnership Shares acquired out of pre-tax salary (in a similar way to pension or salary sacrifice arrangements)
- No income tax on dividends reinvested in Dividend Shares
- No capital gains tax as long as shares continue to be held within the SIP.
The employer company can also claim relief from CT for an amount equal to the market value of the shares at the time they are acquired by the plan trustee, but the relief is given only at the time the shares are subsequently awarded as Free or Matching Shares.
Matching and Free Shares must be subject to a holding period set at between 3 and 5 years. The company may provide that Matching and Free shares be forfeited for no value if the employee leaves within a period fixed at up to 3 years.
Awards of Free and Matching Shares may be linked to performance.
If any SIP shares cease to be held in the plan within 5 years, either because the employee leaves or in certain other circumstances, then there may be charges to income tax and NICs, unless the employee leaves by reason of injury, disability, redundancy, TUPE transfer, the employer company being sold outside the group, death in service, or retirement.
- If the shares cease to be held in the plan within 3 years, income tax (and, if relevant, NICs) is charged on the market value of the shares at that time.
- If it is more than 3, but less than 5 years, then tax is charged on the initial market value of the shares as at the time of acquisition (or, in the case of Partnership Shares, the amount deducted from salary to acquire them) or, if less, their market value at the time of withdrawal.
No tax is charged on a forfeiture of Free or Matching Shares.
SIPs are commonly used by quoted companies to offer a large pool of employees the opportunity to hold shares, with the assistance of a professional share plan administrator.
An independent unquoted company which qualifies to establish a SIP should consider carefully establishing a simplified SIP which provides only for employees to acquire Partnership Shares out of gross salary. This allows employees to benefit from the generous tax reliefs afforded to SIPs and to realise value along with the main shareholders on an exit.
A very simple SIP such as this, used for a single round of Partnership Shares awards for employees who put their efforts into building the company at an early stage, can be administered cheaply in-house with relatively minor assistance from the company’s accountants. Because HMRC will agree significant discounts to the value of small holdings in a private company, £1,800 worth of shares can go a long way – and can be a significant motivator for employees to feel that they are on the same page as the company’s owners.
How Pett Franklin can help
- Design of SIP schemes;
- Structuring of share rights;
- Valuation analysis to reach a basis on which to operate tax;
- Tax analysis of the plans and the related reliefs;
- Financial modelling; and
- Legal documentation.