A buyer’s guide to share incentive plans

Firms are always keen for workers to hold on to their company share holdings for as long as possible, however, there are more than just ethical issues surrounding how strongly the ‘escape window’ is publicised to staff, says Kate Donovan

Last year saw share incentive plans (Sips) celebrate their five-year anniversary, when employees were given their first opportunity to exit the plans and take advantage of the available tax break on their shares.

Many anticipated that this would spark a rush of staff looking to sell their shares, not least because the five-year period is longer than the three years which applies to other all-employee share schemes. Peter Leach, director at Killik Employee Share Services, says: "People are starting to be able to get their shares out of the plan if they wanted to in a tax-free way. It’ s really what joining the plan was all about."

Instead, the anniversary has been met with mixed reaction, namely a dilemma over whether employers should make shareholders widely aware of the tax breaks available after five years or draw minimal attention to the date to encourage employees to leave shares where they are.

Paul Stoddart, head of new business at HBOS Employee Equity Solutions, explains: "There’s always the tension with employers. They want staff to be shareholders but, at the same time, they want them to feel the benefit of being a shareholder. Employees don’t own shares as an end in itself, [the aim is] to accumulate wealth so, ultimately, they want to sell those shares to realise that wealth. I think there is [a] benefit in making sure employees realise that the whole purpose in participating in the share plan is to get some value out of it. For example, when we [have] a really good maturity in sharesave, there’s no better advert to the rest of the workforce than to see people getting a lot of cash. If people are making some profit on a plan they’ll generally go round and talk about the car they’ve bought and the holiday they’ve been on and that’s good advertising."

Another option for employers to consider, particularly those that have a scheme maturing this year, is to inform staff that they can keep hold of their shares through the trust rather than selling them right away. Tax-wise, this can put staff in a strong position.

Justin Cooper, managing director of share plans and regulated business for Capita Share Plan Services, says: "You can actually harbour your emerging shares through any Capital Gains Tax (CGT) liability by effectively doing nothing. You won’t get any CGT liability as long as you leave the shares in the trust."

If employees later decide to sell the shares, they are liable for CGT, subject to the annual exemption, on the difference in price between removal from the trust and at disposal.

Some providers are advising clients not to actively encourage staff to sell their tax-free shares at the end of five years, so protecting the company share price. Employers are, however, obliged to regularly alert employees in a scheme of the status of their shares.

New market trends
Despite the advantages of Sips, however, many providers are frustrated that the minimum holding term before employees can gain tax relief is set at five years. There is a concern that this can make Sips appear less attractive to employees as five years may seem like a long time before they stand to reap any benefits.

Stoddart believes two major changes that providers and employers hope to see is a reduction of the tax-free period from five to three years and the elimination of the 10% limit that prevents employees from investing too much of their salary.

But this doesn’t detract from the fact that Sips are a good way to encourage employees to hold shares in their employer. Organisations that offer Sips may see an improvement in measures such as staff recruitment and retention. Phil Ainsley, senior manager of employee benefits services at Lloyds TSB Registrars, says: "A Sip does encourage people to take a lot more notice in their company’s share price and has a positive impact on staff retention. We’ve been hearing from a lot of our clients that people recognise the value that has been built up within a Sip. It can obviously build up to significant values over time, and if there’s a chance that employees may lose some of that if they go to pastures new, then that’s a strong argument for staying."

Having passed the five-year milestone, speculation into the next trend for Sips has begun. Since the pension tax changes of A-Day (6 April 2006), all employees can transfer shares held in a Sip into a Self Invested Personal Pension (SIPP). This is an option that some providers recommend as a means to gain further tax relief.

Leach explains that the move may be more attractive to employees nearing retirement who are without sufficient pension provision. "We’ve talked a bit about it for the past year because we’ve launched a corporate SIPP, so where we’ve got Sip clients there will be a mechanism for employees to, if they wanted to, on a monthly basis put half of their shares in, and as they become tax free just trip-lead them in and start to build up the pension part," he says.

Healthy package
The market is also likely to see a stronger link between employees’ overall benefits and Sips. "Companies are suddenly realising that when they put these plans in place, people may have been saving £30, £40 [or] £50 a month, and it wasn’t a huge value, but five years down the line you’re now starting to get £15,000 or £20,000 in a lot of plans. If you put that into someone’s total reward statement along with their salary [then] what was looking like a fairly ordinary package is suddenly looking incredibly healthy, particularly if they’re looking at having to compete in a difficult recruitment market. It’s a strong argument," says Ainsley.


What are share incentive plans (Sips)?
A share incentive plan is an investment vehicle which offers tax and national insurance breaks to employees if they hold shares for five years. Staff may invest up to £1,500 or 10% of their salary (depending which is lower) in partnership shares per year, which their employer can choose to match up to a maximum ratio of two-to-one. Employees can also be granted a free shares up to a maximum of £3,000 in any tax year. Dividends from shares, meanwhile, can be re-invested up to an annual limit of £1,500.

What are the origins of Sips?
Share incentive plans were introduced in the Finance Act 2000 to close the perceived productivity gap between UK and European economies, and promote wider employee ownership within organisations.

Where can employers get more information and advice?
Employers can obtain more information on share incentive plans through HM Revenue & Customs (HMRC) at: www.hmrc.gov.uk/shareschemes/sip_employers.htm The not-for-profit industry body ifsProshare is also a good source of information, which can be found at: www.ifsproshare.org


What are the costs involved?
When implementing a Sip, employers should consider ongoing administration costs as well as the expense involved in employing a provider to design the plan, its rules and trust deeds. Fees will typically depend on employee numbers. As a guide, a fairly standard set up should cost no more than £25,000.

What are the legal implications?
Employers must adhere to HM Revenue & Customs rules and legislation, including the Income Tax (Earnings and Pensions) Act 2003. Firms must set up a trust to hold Sip shares and open the plan to all staff. Shares used in a plan must be in a company listed on a recognised stock exchange or in a subsidiary of such a firm.

What are the tax issues?
Employees buy partnership shares before income tax and NI contributions (NICs) are deducted from salary, although employers must obtain HMRC approval to benefit from tax exemptions.

Matching or free shares awarded by the company are also free from income tax and Capital Gains Tax (CGT) if they are held in trust for five years or more. Shares can be traded after three years but may not attract full tax relief.

A few employees may find their social security benefits, statutory maternity pay and statutory sick pay are affected by participating in a Sip.

Employers can claim relief against corporation tax and the organisation’s NICs on shares which are bought or awarded to employees through a Sip.


What is the annual Sip spend?
The annual spend on Sips is difficult to estimate because many shares are based in foreign stock markets.

Which providers have the biggest market share?
According to Lloyds TSB Registrars, Capita Share Services is thought to have the most Sip clients, following the acquisition of Abbey National Aesop Trustees (ANAT) last year. Lloyds TSB Registrars, itself, claims to have over a third share of Sip business. Other providers with a strong presence in the market are: HBOS Employee Equity Solutions; Computershare; Yorkshire Building Society; The Share Centre; and Barclays Stockbrokers.

Which Sip provider has increased its market share the most?
While exact industry figures are unknown, growth has slowed as many larger companies have already implemented Sips. Capita Share Services’ capture of ANAT and HBOS’ merger with Mourant Equity Compensation Solutions have added to both their numbers.