Schedule 2 share incentive plan (SIP): Types of award: Free shares: Plan requirements
If a Schedule 2 SIP provides for free shares it must meet requirements relating to:
- The maximum annual award, and
- The holding period
If the SIP provides for free shares and performance allowances, it must also meet the requirements of paragraphs 38 to 40 and either 41 or 42 Schedule 2 (see ETASSUM24150).
Maximum annual award
A company can award free shares worth up to £3,600 to each eligible employee in each tax year. The market value of the shares is taken at the date of the award and is calculated in accordance with the definition in the rules of the Schedule 2 SIP – see ETASSUM28180. Shares subject to restrictions, including a risk of forfeiture, are valued as if there was no such restriction (paragraph 35).
The company must set a holding period for each award of free shares, during which the plan shares must be held in the plan trust. The Schedule 2 SIP must require participants to be “bound by contract with the company”:
- to permit their free shares to remain in the hands of the trustees, and
- not to assign, charge or otherwise dispose of the beneficial interest in the shares (paragraph 36(1)) throughout the holding period.
A company may use a standalone form of free share agreement or may combine this with a partnership share agreement, alternatively they may use an opt-out arrangement for each award of free shares, (See ETASSUM28250 for a specimen example of a free share agreement).
The holding period must be at least three years but the company can choose any period between three and five years from the date of award of the shares (paragraph 36(2)). The period must be the same for all shares awarded at the same time. The plan rules can permit different holding periods to be set for different awards of free shares, but they must prevent the holding period from being increased once the award is made (paragraph 36(3)).
Participants who have been awarded free shares normally have to allow their shares to be retained in the plan for the whole of the holding period. However, the holding period will automatically come to an end if:
- the participant leaves relevant employment (paragraph 36(5)),
- the trustees accept an offer for the free shares at the participant’s direction (paragraph 37) or the shares are compulsorily acquired (e.g. in a takeover situation) – see ETASSUM24130, or
- the company terminates the SIP and the participant consents to the early removal of the shares (paragraph 90).
If free shares are awarded subject to forfeiture, the existence of a holding period will not prevent those shares from being forfeited when an employee leaves employment.