Share Incentive Plan (SIP) - worth the wait?

Posted by RM2 at 09:51 on 7 Mar 2018

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The Chancellor recently answered an online question, regarding the tax ad, which represents the employee ownership industry, found that employees found the five-year holding period for the Share Incentive Plan (SIP) to be too long before being able to sell shares tax free and it often stopped them from taking part.

Disappointingly, the Chancellor confirmed that the government has no plans to review this minimum holding period. This is despite calls to reduce the holding period to three years to increase participation and to further promote employee ownership. A recent survey by Proshare, which represents the employee ownership industry, found that employees found the five-year holding period for SIPs to be too long before being able to sell shares tax free and it often stopped them from taking part.

What is a SIP?

Despite the five year holding period, in our view SIP remains a fantastically flexible and tax efficient employee share scheme for companies wishing to offer share ownership to all employees.

Under a SIP there is no income tax charge on acquisition of the shares for employees. An employee can receive up to £3,000 worth of 'free' shares in the company each tax year under a SIP. Employees can also be offered the opportunity to buy 'partnership shares' in the company out of their gross salary (i.e. before the deduction of tax and NICs), subject to a maximum of £1,500 per year. If an employee buys partnership shares, the company may then offer additional free 'matching shares' up to a maximum ratio of 2:1 (i.e. a further £3,000 worth of shares per tax year).

Employees can also choose to reinvest dividends in acquiring further shares in the company.

If shares are kept in the SIP trust for 5 years, then no income tax or NICs will apply to those shares. Further, for as long as the shares are held in the SIP trust, any increase in value will also be free of capital gains tax.

The SIP must be offered to all employees of the company or the group on the same terms. As the offer of shares can be made annually, significant amounts of potentially tax-free value can be transferred to employees in this way.

RM2 advises on all aspects of the design and implementation of a SIP, including providing valuation advice. In addition, RM2 administers SIP trusts on behalf of its clients, typically acting as corporate trustee for the SIP trust.

If you’d like to discuss a SIP or other employee share scheme arrangements, please call us on 020 8949 5522 or email us at enquiries@rm2.co.uk. You can also download a factsheet which contains more information.