The removal, in 2013, of the ‘material interest’ test, coupled with the freedom to use ‘restricted shares’ and the removal of a potentially penal ‘clawback’ charge to income tax and NICs upon a sale of the company within 5 years, have led to an upsurge in interest in Share Incentive Plans amongst private companies.

By contrast with EMI share options and EIS/SEIS investments, there is no ‘qualifying activities’ requirement and this opens up the possibility of founder shareholders who are bona fide directors or employees of investment, as well as trading, companies acquiring, or being awarded, shares under a SIP (typically subscribed by the plan trustees using either monies contributed by the company for ‘free shares’, or by participants as ‘partnership share money’) at a time when the ‘market value’ of the shares is very low.

Even if the individual participant acquires more than 5% of the issued share capital in this manner, the complete exemption from capital gains tax for so long as the shares remain held in the plan, is more attractive than a reduced 10% rate if the participant qualified for Entrepreneurs’ Relief.

But, a potential ‘trap for the unwary’….

Private and unquoted companies operating a Share Incentive Plan may need to check and, if necessary, amend their articles of association and/or any shareholders’ agreement to take account of a small change to Schedule 2, ITEPA 2003 made by the Finance Act 2014 ostensibly to correct an anomaly created by the changes made in 2013 to allow awards to be made of restricted shares. 

‘Partnership shares’ and ‘dividend shares’ must not be subject to any ‘risk of forfeiture’. Many private company articles and shareholders’ agreements provide an obligation on employees who leave to offer for sale their shares at a price which, if the employee is a ‘bad leaver’ may be less than the market value of the shares at the time of sale. This, of course, is a ‘risk of forfeiture’.

Amendments to paras 43 and 65 of Schedule 2 specifically permit a SIP participant to be obliged to offer shares for sale (e.g. on leaving employment with the company or group), but only if the price at which they are required to be so offered is at least equal to the amount of cash applied in purchasing the shares on behalf of the participant or, if less, their market value at the time they are offered for sale. That time is typically – but not always – when a ‘transfer notice’ is deemed to be given in respect of the shares. If, for example, the time when the ‘market value’ of such shares is to be determined is specified as some other time (such as, for example, the leaving date, or a later date when any offer for sale of the shares is accepted), it may be necessary to amend the provisions so as to ensure compliance with those amended paragraphs.