Unapproved Plans/Schemes

Long-Term Incentive Plans (L-Tips)

L-Tips are the award of free shares to specific employees and are conditional, usually on specific performance targets being reached.

Generally they will bind employees to the company for a specific period of time; it they leave prior to this, the benefit will be lost. The plan is normally subject to forfeiture provisions whereby the employee will loose all entitlements to the shares should specified performance targets not be met.

L-TIPs are generally administered through an Employee Benefit Trust (EBT), which is funded by the company.

When an employee reaches their target their shares can be allocated, transferred or sold from the EBT or the employee becomes beneficially entitled to the shares.

The employee is generally liable to income tax on receiving the shares if they do not acquire them for market value. In such circumstances a liability to employee’s and employer NICs may also arise. Any growth in value in the shares after they have been acquired will be subject to capital gains tax on disposal.

Contributions made by the company may be deductible as an expense against profits chargeable to corporation tax as being wholly and exclusively for the purpose of the company’s trade although this may be challenged by HMRC. A deduction against profits chargeable to corporation tax may be available on the market value of shares at the time they are awarded to employees.

For further information see: www.hmrc.gov.uk/manuals/ihtmanual/IHTM42900.htm

Unapproved Share Option Schemes

Unapproved Share Option Schemes do not require HMRC approval and there are no limits on the number or value of the options that can be issued to a director or an employee.

There is no favourable tax treatment, income tax and possibly NICs are payable on the exercise of the option on the market value of the shares at the date of exercise less the amount paid for them.

Capital Gains Tax (CGT) will be payable on the eventual sale of shares. The capital gain will be calculated on the difference between the sale proceeds and the amount paid for the shares. This will be subject to a flat rate tax of 18% after deducing from the chargeable gain the annual exemption of £10,100. Entrepreneur’s Relief (see below for more details) may be available.

For further information see: www.hmrc.gov.uk/manuals/ersmmanual/ERSM110010.htm