The Finance Act 2013 made some key changes to approved share schemes (comprising share incentive plans ("SIPs"), save as you earn ("SAYE") share option schemes, company share option plans ("CSOPs") and enterprise management incentives ("EMIs")). Although many of the changes take effect without the need to amend the scheme rules, all rules should be reviewed to ensure that they are consistent with the new legislative changes.
1. SIP, SAYE and CSOP amendments
Tax-favoured early exercise of options. Previously, legislative provisions setting out when shares could be delivered free of income tax and national insurance contributions ("NICs") before maturity of an award or option were inconsistent for SIPs, SAYE schemes and CSOPs.
The Finance Act amendments harmonised the tax treatment on early exercise for these schemes (although the inclusion of the relevant provisions remain optional in CSOPs).
Shares held in SIPs can be delivered and options under SAYE schemes and CSOPs can be exercised early free from income tax and NICs within six months of:
- a change of control of the employing company (provided that the employing company is not the company whose shares are the subject of the award or under option);
- an employee ceasing employment following a business (TUPE) transfer; and
- a cash takeover, provided certain conditions are met, including that the offer must not have permitted the employees to exchange their options for new options in the acquiring company.
Material interest rules. Employees were not previously permitted to participate in approved share schemes if they had a "material interest" in the company. The Finance Act removed this restriction entirely for SAYE schemes and SIPs, and increased the material interest threshold from 25 percent to 30 percent for CSOPs (which is the same as the threshold for EMIs).
Use of restricted shares. Generally, SIPs, SAYE schemes and CSOPs could not be used to deliver shares that were subject to restrictions. This limitation was removed in the Finance Act. Rather, schemes must disclose any relevant restrictions to participants, and whenever shares need to be valued (for example, to establish scheme limits), that calculation must be made on the basis that the shares are not subject to any restrictions.
Exercise on retirement. The legislation allowed early leavers to remove their SIP shares or exercise their CSOP or SAYE options tax free on retirement. What amounted to "retirement" for the purposes of the legislation for each type of scheme differed and, in particular, the specified age a person must have reached before retirement possibly differed. The Finance Act simplified tax-free delivery of shares on retirement by removing the specified age provision. Consequently, when a participant ceases to be an employee by reason of retirement, the removal of shares from a SIP is tax free and options in SAYE schemes and CSOPs may be exercised tax free within six months of retirement.
UK Revenue guidance will clarify the meaning of "retirement" for these purposes and, in particular, will specify that retirement must take its normal and natural meaning and that an employee will not be able to retire for the purposes of benefitting from one of the tax-advantaged share schemes, but not for other purposes.
Seven-year savings period for SAYE schemes. Seven-year SAYE savings periods (and therefore seven-year options) were withdrawn from July 23, 2013.
2. EMI amendments
Entrepreneurs' relief. The Finance Act extended entrepreneurs' relief for capital gains tax purposes to EMI options and relaxed the rule requiring the shareholder to hold 5 percent of the capital and voting rights in the company. The employee must still hold the shares for at least 12 months before disposal, but the period that the option has been held will now count toward this 12-month period.
Time period for tax-free exercise following disqualifying event. For a tax-free exercise to be possible following a disqualifying event, exercise previously had to occur within 40 days. This time period has now been extended to 90 days.
These changes have generally simplified approved share schemes, and the removal of the prohibition on the use of restricted shares is likely to open up approved share schemes to private companies. The move to self-certification of all approved share schemes in 2014 may well, however, be the stronger factor in increasing the use of such schemes by companies as it will reduce the costs and time of implementation. Self-certification will, however, potentially create greater uncertainty over whether the scheme terms satisfy the statutory requirements for certain tax reliefs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.