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UK Share Plans
December 2015
Offering share incentives to UK employees
The UK has a well established history of employee share ownership. Some specific forms of share plan
benefit from tax-advantaged treatment in the UK. These, and other types of share plan, can also be used by
companies outside the UK as a means of incentivising employees in the UK. Sometimes this will be under
stand alone plans – often there will be a UK sub-plan linked to the parent company’s equity plan. Where no
special UK plan is appropriate, care is still needed in rolling out an overseas plan to UK employees.
Introduction
Share plans, as a means to recruit, retain and reward employees, are well-recognised in the UK. Plans in the UK may benefit all
employees, or target senior executives, and may be structured in a number of different ways.
It can be quite straightforward for a non-UK employer to offer share incentives to UK employees, whether as a stand-alone plan in the
UK, or as a part of a wider plan for the benefit of all employees. However, companies offering shares for sale directly to UK employees will
need to confirm at an early stage that they can benefit from one of the exemptions from the requirement to publish a prospectus.
The tax treatment is likely to be an influential factor in structuring a plan to deliver shares to UK employees. Given continuing higher rates
of income tax for high-earners when compared with capital gains tax, employers are currently looking with renewed interest at the various
types of plan which deliver benefits to employees in a capital form – and so are subject to tax under the more beneficial capital gains
regime. In the UK, individuals have a generous capital gains tax annual exemption, above which gains are, currently, taxed at a flat rate.
Tax-advantaged plans
Successive governments have encouraged employee share ownership through tax-advantaged plans offering beneficial tax treatment for
companies as well as employees. These are:
•Savings-Related Share Option Plans (SAYE)
•Share Incentive Plan (SIP)
•Company Share Option Plans (CSOP)
•Enterprise Management Incentive Plans (EMI).
SAYE
•Offers beneficial tax treatment
•Savings up to £500 per month
•Savings over three or five years
•Option price may be discounted by 20%
•“All employee” requirements
•Six month “normal” exercise window at end of savings period.
CSOP
•Offers beneficial tax treatment
•£30,000 individual limit
•Discretionary or broadly-based
•Tax benefits if exercised after three years
•Early exercise may trigger payroll taxes
•Option price not less than market value.
SIP
•Offers beneficial tax treatment
•Share ownership from outset through plan trustee
•Partnership shares bought from pre-tax earnings up to £1,800
per year (capped at 10% of an employee’s annual salary)
•Up to two matching shares for each share purchased
•Free shares up to £3,600 per year
•Tax free after five years in plan – early withdrawals may trigger
payroll taxes
•Leavers’ shares must come out of plan
•“All employee” requirements.
EMI
•Offers beneficial tax treatment – changes in 2013 improved the
interaction between EMI and “Entrepreneur’s Relief” from CGT
•Only smaller “trading” companies and groups
•£30 million gross assets test
•£250,000 individual limit
•Option price may be discounted but only gains above market
value are tax protected
•A UK-based company can qualify, even if it has significant
overseas activity.
SAYE and SIP must be offered to all qualifying employees, whilst CSOP and EMI may be offered selectively.
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UK Share Plans
December 2015
A tax-advantaged plan offers exemption from taxation as earnings on the growth in share value, provided that all conditions set out in
the relevant UK tax legislation have been met and (where required) the UK tax authorities have been notified of the plan and the
company has certified both initially and following any amendments to the plan rules and variations in share capital (where relevant) that
the requirements of the relevant UK tax legislation are met in relation to the plan. With the exception of EMI, or specified “good leaver”
or “company event“ circumstances, the award is subject to a minimum holding period in order to secure the tax-advantaged treatment.
Where the tax-advantaged treatment applies:
•Employees benefit – the individual will generally be taxed on the growth in share value only on a disposal of the shares, and at that
stage, under the more beneficial regime for the taxation of capital gains
•Employer also benefits – the company will have no liability to pay employer’s national insurance contributions and in many cases a
statutory corporate tax deduction will be available.
Companies based outside the UK can offer UK tax-advantaged plans to their UK work-force if the statutory conditions are satisfied – for
instance it is quite common for a non-UK parent to operate a tax-advantaged schedule under the CSOP rules for its UK executives as part
of its overall share plan.
Plans which are not tax-advantaged
Despite the tax benefits of tax-advantaged plans, these may not be suitable in all cases, as:
•Not all companies can meet the statutory conditions for tax-advantaged plans
•Companies may not be able to make awards large enough to achieve their commercial objectives through tax-advantaged plans
because of the individual limits
•Companies may feel the benefits are outweighed by other commercial factors.
Other share incentive plans, which do not benefit from any special tax regime, are also therefore common. Without the need to fulfil
statutory conditions, and without any individual limits on the size of awards (subject to corporate governance and best practice
requirements), these can be very useful and flexible tools for delivering incentives.
The most straightforward plans, which are not tax-advantaged, involve the grant of options, or award of contingent shares, so as to
deliver the growth in share value (or for “nil-cost” awards, the entire share value) to employees, subject to UK income tax and national
insurance contributions. In most cases the UK employer has to account for the tax and national insurance contributions through the
pay-as-you earn system.
However, there are more complex structures available, which under current rules can also deliver growth in value as capital rather than as
income, so that employees are subject, as in the case of tax-advantaged schemes, to the more beneficial capital gains tax regime. One
example is a joint ownership arrangement such as the ExSOP™ (Executive Shared Ownership Plan), developed by Pinsent Masons.
Other factors
In addition to tax, employers should consider other issues relevant to delivering share awards to UK employees, including:
•Securities laws: if shares are to be offered directly for sale to UK employees, the EU Prospectus Directive will be relevant. Following
welcome changes in 2012, EEA incorporated and/or EEA listed companies will be able to rely on an exemption if certain information
requirements are complied with. However, non EEA incorporated/listed companies may still face potentially onerous publication
requirements unless exemptions for smaller-scale offers are available.
•Employment laws: what will be the risks if the employee leaves? In what circumstances may employees bring claims for plan benefits?
•Accounting/recharge arrangement: how will the plan impact the accounts of the parent company and/or local employing company?
When is a corporate tax deduction available and will any costs be recharged to the local employer?
•Data protection: Will employees’ data be secure and have all necessary steps been taken to comply with UK data protection legislation?
•Commercial: How will the plan be administered? How will the shares be provided? How will the group track employees who move
from one country to another?
•Approvals: will shareholder approval be required or desirable as a matter of best practice?
•Reporting: What reporting and disclosure requirements will need to be complied with?
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UK Share Plans
December 2015
Pinsent Masons is a founding corporate sponsor of the Global Equity Organisation (www.globalequity.org) and has extensive experience
of advising UK and multinational companies in relation to share incentives, employment, tax and pensions.
Who to Contact
Lynette Jacobs
Partner
T: +44 (0)161 250 0198
M: +44 (0)7717 488467
E: [email protected]
Karen Davidson
Legal Director
T: +44 (0)141 567 8535
M: +44 (0)7738 892122
E: [email protected]
Suzannah Crookes
Legal Director
T: +44 (0)113 294 5233
M: +44 (0)7585 996328
E: [email protected]
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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© Pinsent Masons LLP 2015.
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