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HMRC internal manual

Capital Gains Manual

Share Incentive Plan (SIP): introduction

The purpose of a Share Incentive Plan (SIP) is to benefit employees of a company through shares which give them a continuing stake in that company. The Share Incentive Plan is very flexible and intended to encourage wide employee share ownership. The plan may not give preferential treatment to directors or to more highly remunerated employees. Under the plan, subject to certain statutory constraints and limits, a company may each year:

  • provide employees with ‘free shares’
  • give employees the chance to buy ‘partnership shares’ through deductions out of their pre-tax salary, and
  • match each partnership share with up to two free ‘matching shares’.

In addition, a plan may provide that dividends on the shares can be reinvested in buying further ‘dividend shares’ for the employee.

A company which is setting up a Share Incentive Plan has to establish a trust as part of the scheme. The company usually gives money to the trustees with which they purchase shares. The trustees then award free and matching shares to employees without payment and apply agreed deductions from salary to the acquisition of partnership shares. If permitted by the plan, they may also use dividends to acquire further dividend shares on behalf of the employee.

The employee is absolutely entitled to the SIP shares as against the trustees of the scheme from the date they are awarded or acquired on his behalf but has to agree to leave free, matching and dividend shares in the trust for a specified period.

There is no liability to Income Tax when plan shares are awarded to or acquired on behalf of an employee and no further liability if the shares are kept within the plan for 5 or more years. For more detail see Part 7 Chapter 6 ITEPA03, Schedule 2 ITEPA03, ERSM303100 and ESSUM20100+.

There is no liability to Capital Gains Tax if the employee retains shares within the plan until he asks the trustees to dispose of them for him. And, if he keeps the shares after they cease to be subject to the plan and disposes of them later, his acquisition cost is deemed to be the market value of the shares at the time they ceased to be subject to the plan. See CG56495.