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HMRC internal manual

Business Income Manual

Specific deductions: employee share schemes: types of schemes

The nature of the share incentives provided to employees under employee share schemes fall into two categories - share options and share awards.

Share option schemes

A share option scheme is a scheme which provides for options (rights to acquire shares) to be granted to a defined group of employees, usually at a price which is equal to the share value at the date the option is granted. The option can then be exercised after a period of time, and usually after the satisfaction during that period of some performance condition. The performance condition may be personal to the employee or may be company-related, for example based on company results during the performance period.

Share award schemes

Share award schemes are often called Long Term Incentive Plans (LTIPs). In the UK these plans will usually be structured to give employees an ‘award’ of a number of shares under which the employee will become the owner of the shares if they stay in employment (and perhaps also meet particular performance conditions) for the required number of years.

If the scheme originates in the United States it is more common to find that the share award gives the employee immediate ownership of the shares, with a risk of having to forfeit the shares if the employment and performance conditions are not met over the required number of years. Such shares are commonly known as ‘forfeitable shares’ or ‘restricted shares’. Although the employee is the beneficial owner of them from the date of the award, the shares are normally held in trust or in escrow. It is unusual to find forfeitable shares or other restricted shares in the hands of the employees themselves.

Types of schemes for tax purposes

For tax purposes both share option schemes and share award schemes fall into two main categories - approved schemes and unapproved schemes.

Approved schemes

These are schemes approved by the Employee Shares and Securities Unit and give employees and employers certain tax and NICs advantages, see BIM44010.

Unapproved schemes

These are any other employee share schemes which have not been approved by the Employee Shares and Securities Unit. This lack of approval does not mean that HMRC disapproves of the arrangements. It merely means that the scheme does not satisfy the requirements necessary to qualify for favourable tax and NICs treatment.