ETASSUM25160 - Schedule 2 Share Incentive Plan (SIP): Rights issues: Treatment of shares acquired

Paragraph 88 makes special provision for the treatment of new shares or other securities acquired by the trustees of a Schedule 2 SIP through exercising rights conferred in respect of participants’ plan shares. For simplicity, the term ‘new shares’ will be used here.

When are new shares treated as plan shares?

The new shares are treated for all Schedule 2 SIP purposes as if they were identical to the shares in respect of which the rights were conferred provided that:

  • the trustees fund the exercise of some of the rights by disposing of other rights in respect of the same participant’s plan shares (‘tail swallowing’) and in accordance with the participant’s wishes (paragraph 88(4)(a)), and
  • similar rights are conferred in respect of all ordinary shares in the company (paragraph 88(4)(b)).

They are treated as being awarded in the same way and at the same time as the original holding of shares (paragraph 88(2)). In other words, they are held in the Schedule 2 SIP as plan shares of the same type and on the same terms as the plan shares from which they are derived. The trustees must allocate new shares between awards, and deal with any fractional entitlements, in the same way as they must on a company reconstruction (see ETASSUM25130).

How are other new shares dealt with?

If the requirements mentioned above are not met (e.g. the participant fund the acquisition themselves), the new shares are not plan shares (paragraph 88(5)(a)). The trustees must distribute the shares, or the net proceeds from selling them or the rights to them, to participants as soon as practicable (paragraph 74(1)). They must also deal with any fractional entitlements in the same way as they must on a company reconstruction (see ETASSUM25130). HMRC will accept a provision of the plan which permits the Schedule 2 SIP trustees to retain capital receipts that do not exceed £5 per participant:

  • to be used to meet general trustee expenses, or
  • to be gifted to a specified registered charity.

This is in line with the UK listing rules practice in relation to such small capital sums. For the purposes of capital gains tax, ss127-130 TCGA 1992 do not apply to these new shares (paragraph 88(5)(b)).