SIPS not SIPPS!

In light of recent events, share schemes may well become even more attractive, particularly where employers are impacted significantly by the economic turmoil and are unable to offer competitive remuneration packages. Share Incentive Plans are not a particularly popular HMRC approved employee share scheme within private companies, so I thought I’d turn the spotlight on this unloved share plan.

Unlike the focused Enterprise Management Incentives, Share Incentive Plans are an all-employee share plan. A restriction can be placed on new starters, but this participation restriction cannot exceed an 18 month timeframe. In addition, the plan shares are held by a discretionary trust; therefore the professional running costs should not be overlooked.

There are four main awards:

Partnership shares – the employees can sacrifice a maximum of £1,800 (or 10% of gross earnings if less) to acquire plan shares.

Matching shares – the employer can award up to two additional shares for every partnership share acquired.

Free shares – each employee can be awarded up to £3,600 of plan shares. This can be varied based upon length of service, contractual working hours, performance and remuneration levels.

Dividend shares – dividends paid on plan shares can be used to acquire further shares.

Whilst this is not the most straight forward employee share plan due to the numerous rules to be complied with, shares subject to a Share Incentive Plan have a powerful benefit in the form of transfers to an ISA tax-free.

Example

On 01.02.2015 Ida acquired 600 partnership shares at £3 a share. Her employer awarded a further 1,200 shares to match this and 700 free shares. No dividends have been reinvested.

Following the fifth anniversary, the share price has increased to £8 a share. Ida having paid only £1,800 to date (out of untaxed income), now elects to withdraw the shares from the plan and transfers £20,000 of shares (within 90 days) to her ISA without tax consequence.

The shares whilst within the ISA wrapper remain tax-free in respect of dividends and capital gains.

Unless the company is in the midst of a significant growth spurt, it is unlikely one year’s award in isolation would justify the ISA management cost, however you can see how an employee could build up a valuable ISA portfolio over a few years and within a tax-free environment.

Whilst this scheme is not for the faint-hearted, it can be a valuable tool to incentivise your wider employee base. If you’d like to discuss the various employee share schemes available to your business, please do get in touch.

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