ACCA ATX ^UK Syllabus A1. Income tax - Share option/Share incentive schemes - Notes ^{1 / 3}

Incentive Schemes

Share related income from employment

An employee incentive scheme provides financial incentives for employees to improve their work performance.

Types of share schemes:

Share incentive plans (SIP)
Company share option plans (CSOP)
Enterprise management incentive scheme (EMIs)
Savings-related share option schemes (SAYE)

Share incentive plans (SIP)

Income tax - when you receive them
Pay No income tax or NIC, (If you hold the shares for more than 5 years)
Capital gains tax - when you sell them
When you remove the shares from the plan, the cost of the shares = M.V. when removed, so there will be no capital gains tax.

How to get the tax advantaged treatment?

Shares must be offered to all employees who have been working in the company for more than 18 months (It can NOT be selective)
Maximum value of shares that the employer can give to the employee each tax year can not exceed £3,600
Shares must be held for 5 years

Consequences of withdrawing the shares before 5 years from SIP

Withdrawing shares in < 3 years
I.T. and NIC consequences:
I.T. and class 1 primary NIC are payable in the tax year of withdrawal based on the market value when withdrawn.
Withdrawing shares in more than 3 years but less than 5 years
I.T. and NIC consequences:
I.T. and class 1 primary NIC are payable in the tax year of withdrawal based on the lower of:
1) MV when first awarded and
2) MV when withdrawn from the SIP
Capital gains tax the base cost of the share is the market value at the time they are withdrawn from the share incentive plan.

Illustration

Jake receives 100 shares valued at £2 from an approved SIP from his employer.

He wants to know the tax implications if he sells them in:

1) 2 years (M.V. £4)
2) 4 years (M.V. £6)
3) 6 years (M.V. £8)

Solution
No income tax will be payable in the year that the shares are received as this is an approved plan.
Selling in 2 years
Income tax and class 1 primary national insurance is payable in the tax year of withdrawal based on the market value when withdrawn.
Benefit:
M.V. £4*100 = £400
Less cost (£Nil)
Taxable benefit £400
Selling in 4 years
Income tax and class 1 primary national insurance is payable in the tax year of withdrawal based on the lower of:
1) MV when first awarded and
2) MV when withdrawn from the SIP
Therefore, M.V. when first awarded is lower at £2
M.V. £2*100 = £200
Less cost (£Nil)
Taxable benefit £200
Selling in 6 years
As the shares are held for more than 5 years in the approved plan, there is no income tax or NIC payable.
Capital gains tax implications
The cost of the shares are the market value of the shares when they leave the plan.
Therefore if withdrawn in 2 years (M.V. £4 is cost), 4 years (M.V. £6 is cost) and 6 years (M.V. £8 is cost)

Share options

A share option is an offer to an employee of a right to purchase shares at a future date at a pre-determined fixed price which is set at the time the offer is made.

The pre-determined fixed price is usually below the market value of the shares at that time.

The taxation consequences of share options depends on whether or not they are approved by HMRC as follows.

The tax advantaged share option schemes are the company share option plan (CSOP), the enterprise management incentive share option scheme (EMIs) and the Save As You Earn (SAYE) share option scheme.

Share option plans

Income tax implications
On Grant:
Pay NO income tax or NIC 
On Exercise:
Pay IT and NIC If: Market value @ Grant date is more than the Exercise price, then the difference will be a taxable benefit.
CGT - When you sell the shares
Pay CGT: (Market value @ sale date - Market value @ grant date) x CGT tax rate

Illustration

Jake wants to offer share options to 5 of his employees under the EMI scheme.

On grant: 10,000 shares/employee when the shares have a market value of £2 and the exercise price is £1.75.

They can be exercised in 6 years when they have a market value of £5.

What conditions need to be satisfied to qualify as an approved EMI scheme?

What are the tax implications?

Solution
Conditions to be satisfied
1) The company must have less than 250 employees.
2) Each employee must work for at least 25 hours/week.
3) The company must have less than £30 Million in gross assets.
Income tax implications
Market value on grant £2
Less Ex. Price (£1.75)
Benefit £0.25*10,000 shares = £2,500
Capital gains tax implications
The cost of shares will be the market value at the grant date.
Therefore,
S.P £5
Less cost (£2)
Capital gain £3*10,000 shares = £30,000
Entrepreneur's relief/Business asset disposal relief will be available at 10% as the conditions are satisfied.

Approved EMI scheme conditions

There are conditions that the company and the employee must satisfy for the share options to get the tax advantaged treatment

Conditions that the company needs to satisfy
1) Gross assets must not exceed £30 million
2) Employees in the company must not exceed 250
3) Maximum value of share options issued must not exceed £3,000,000
Conditions that the employee needs to satisfy
1) Employees must work for at least 25 hours per week
2) Employee must own less than 30% of the shares in the company
3) Maximum value of share options per employee £250,000

Approved CSOP scheme conditions

There are conditions that the company and the employee must satisfy for the share options to get the tax advantaged treatment

Conditions that the company needs to satisfy
1) Gross assets must not exceed £30 million
2) Employees in the company must not exceed 250
3) Maximum value of share options issued must not exceed £3,000,000
Conditions that the employee needs to satisfy
1) Maximum value of share options that can be issued is £60,000 per employee
2) Each employee must own less than 30% of the shares

SAYE scheme

Employees are granted an option to buy shares and then save through a tax-free savings scheme in order to raise funds to exercise the option.

There is favourable tax treatment for share option schemes that are linked to a SAYE (Save As You Earn) contract.

How does the scheme operate?
Each employee pays a minimum of £5 per month and a maximum of £500 per month into a SAYE scheme, for a period of 3 or 5 years.
Interest on the scheme is exempt from income tax.
At the end of the scheme the money can be used to exercise the share options or the employee may just withdraw the money on their own.
Income tax and NIC implications
No income tax or national insurance will be charged on the grant of the option.
No income tax or national insurance will be charged on the exercise of the option.
Capital gains tax implications
On the subsequent disposal of the shares, a capital gain may arise.
Conditions for the SAYE scheme
1) The amount saved must be at least £5 per month but cannot exceed £500 per month.
2) The savings contract must last for three or five years.
3) The scheme must be available to all employees (full and part-time) who have worked for a specified qualifying period (which cannot exceed five years).
4) The exercise price must be at least 80% of the shares’ market value at the time that the option is granted.

Illustration

B plc. has a proposed SAYE scheme.

The duration of the scheme is 5 years.
The maximum monthly deposit into the scheme is £500.

The scheme is available to all employees who have worked for at least 3 years.

Exercise price £2.48
Market value at grant date £3

Will this qualify to be an approved SAYE scheme?

Solution
Yes it will be.
The conditions that have been satisfied are:
1) The amount saved per month does not exceed £500.
2) The savings contract lasts for 5 years.
3) The scheme is available to all employees who have worked for 3 years.
4) The exercise price is 82% (£2.48/£3*100%) of the market value at the grant date.