Share Incentive Plan tax savings: twice as nice!
The default tax position for employees acquiring shares in their employer is a charge to income tax. This surprises some employers who think that shares must be capital assets and therefore taxed more favourably than cash no matter how the shares are delivered to staff.
RM2 advises on the many different ways in which companies can structure an award of shares to employees to ensure that the optimum incentive is established. There can be no denying that tax considerations play a part in that and if you ask someone what rate of tax they want to pay, in an ideal world, they will often answer “None!”. This holy grail of share plan taxation, zero tax charge on acquisition of the shares by an employee and keeping them tax free into the future, is achievable using a Share Incentive Plan (SIP) and good on-going share plan administration.
The SIP award
Under a SIP (which is an all-employee rather than a discretionary plan) employees may be offered shares in a number of ways. The Company can opt for one or more of a combination of the transfer methods.
Each year, employees can receive up to £3,000 worth of ‘Free’ shares in the Company. The shares are appropriated to each eligible employee and held on their behalf within a statutory employee share ownership (SIP) trust.
Employees can also be offered the opportunity to purchase ‘Partnership Shares’ paid for out of gross or pre-tax income before deduction of tax and NICs, subject to a maximum investment of £1,500 per year.
If the employees take up the offer to purchase shares, the company may then offer additional free ‘Matching Shares’ to a maximum ratio of 2:1 i.e. a further £3,000 worth of shares per annum.
Finally, employees can receive shares in lieu of cash dividends up to an annual limit of £1,500 worth of ‘Dividend Shares’.
A grand total of £9,000 worth of shares may therefore be offered to each employee per tax year.
Tax implications – good news!
If the shares remain within the trust for 3 years, no income tax or National Insurance Contributions (NICs) for either employer or employee are payable on any gain in value. However, if the shares remain in trust for 5 years, no income tax or NICs of any description is payable on the value, including the initial value. As the offer of shares can be made annually, significant amounts of potentially tax-free value can be transferred to employees in this way.
Company advantages – more good news!
Under the SIP legislation, the company will enjoy Corporation Tax relief when the shares are appropriated to the employees (i.e. when the shares are placed in trust on behalf of the employees). The employees in turn receive share appropriation certificates. At this stage, the company will receive the tax advantage on the value of shares passed into the trust.
In respect of the ‘Partnership’ shares, the employees can elect to save amounts of up to £125 per month or £1,500 per annum from pre-tax salary. No income tax, employer or employee NIC liabilities occur on these savings. The NIC savings to employers can therefore be significant depending on the participation rates.
Through a SIP, employees can enjoy the opportunity to receive significant share incentive arrangements through a combination of tax-efficient transfer methods, but what about after the shares have reached the 5 year maturity date?
SIP maturity – yet more good news!
Under the terms of a SIP, shares that have been held in the Plan for 5 or more years may be released without any liability to income tax or national insurance contributions. The 5 year point is from the original date of purchase. Therefore, if a Plan participant purchased Partnership Shares on 1st May 2007, these shares will reach the 5 year anniversary on 2nd May 2012 and can then be released. If an employee purchased shares on a monthly basis, each set of Partnership Shares may be released as and when each 5 year anniversary of the date of purchase is reached.
Once the 5 year anniversary is reached, the income tax and NIC savings that were received when the employee’s original salary deduction was contributed to the Plan, will no longer be subject to claw back. Also, under the SIP legislation, for as long as the shares remain in the Plan, the employee will not have to pay any Capital Gains Tax (CGT).
After the 5 year anniversary, the employee also has the option to continue to receive the favourable CGT treatment mentioned above by transferring shares into a Self Invested Personal Pension Plan (SIPP) or a Stocks and Shares ISA (ISA). To take advantage of this option, once shares have been requested to be released from a SIP, they must be transferred into a SIPP or ISA within 90 days of the date of release. The transfer of shares from a SIP into a SIPP also attracts income tax relief. This means that it is possible for the shares to be ported into an investment wrapper environment, so that future share growth remains protected from tax levy.
Companies administering their SIP in-house often do not recognise this opportunity at maturity, whereas a proactive professional administrator, like RM2, will advise participants of the available options. If you would like to find out more about transferring your SIP shares to a SIPP or an ISA, please contact RM2, who can put you in touch with a specialist advisor regulated by the Financial Services Authority and authorised to give the relevant investment advice. The RM2 Partnership Ltd is not authorised to provide such advice but does implement and administer SIP plans and can advise if the company shares are subject to transfer restrictions which might restrict the availability of this further investment planning opportunity.