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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

HM Revenue & Customs
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Schedule 2 share incentive plan (SIP): Types of award: Free shares: Holding period - power of participant to direct trustees

Paragraph 37 provides an exception to the general rule that participants must not “assign, charge or otherwise dispose of the beneficial interest” in their free shares during the holding period. It allows a participant to direct the trustees to:

  • accept an offer for any or all of their free shares in return for a new holding which equates for capital gains tax purposes (paragraph 37(2)),
  • agree to a transaction affecting the free shares (or those of a particular class) as a result of a compromise, arrangement or scheme (paragraph 37(3)) – essentially, a capital reorganisation,
  • accept an offer for the shares of cash or a qualifying corporate bond, with or without other assets, as part of a general offer (paragraph 37(4)).

This exception is normally included in the trust deed or rules of a Schedule 2 SIP but it is not a requirement for a Schedule 2 SIP and it is not strictly necessary. The same provisions apply to matching shares and dividend shares by virtue of paragraphs 61 and 67 respectively. 

For further information on transactions within the scope of paragraph 37 and their effect on plan shares generally see ETASSUM25100 onwards.

Offer of a new holding of securities

This will normally arise in the context of a share-for-share exchange, for example when a new holding company is inserted above the company whose shares are held in the Schedule 2 SIP. Although the new holding must equate for capital gains tax purposes to the free shares which they will replace, paragraph 37(2) contains no stipulation about the form of the new holding. The participant, therefore, can direct the trustees to accept any securities which equate for CGT. 

Compromise, arrangement or scheme

These can take many forms but include court-sanctioned schemes of arrangement under section 899 Companies Act 2006 or overseas legislation. Paragraph 37(3) stipulates that the compromise etc. must be “applicable to or affecting”:

  • all the ordinary share capital of the company or all the shares  of the class in question (in which case only plan shares of that class can be the subject of participants’ directions),
  • all the shares (or all the shares of the class in question) held by a class of shareholders. The “class” in question cannot be defined by reference to their employment or participation in a Schedule 2 SIP, thus ensuring that Schedule 2 SIP participants or employees generally cannot be treated differently from other shareholders.

General offers

To fall within paragraph 37(2), a general offer must satisfy two conditions:

  • it is made to holders of shares of the same class as the participant’s or to holders of shares in the same company, and 
  • it is made in the first instance on a condition such that, if satisfied, the offeror will control the company within the meaning of Sections 450 & 451 CTA 2010.

It follows that the offer must normally be made to all such holders of the shares in question but there may be some exceptions e.g. where the offeror already owns or controls some of the shares.