HMRC internal manual

Employment Related Securities Manual

ERSM20192 - Employment-related securities and options: what are securities: Long Term Incentive Plan (LTIP)

A Long Term Incentive Plan (LTIP) is a generic name for a plan that aims to provide incentives to employees over the long-term, usually a year or more, via reward linked to shares or securities. It could involve the award of securities, the grant of securities options or be a cash bonus scheme that tracks movements in securities. The particular form that an LTIP takes will determine its taxation treatment.

Restricted stock units (RSU)

LTIPs frequently use what are known as restricted stock units, or restricted share units (RSUs). An RSU award is normally an agreement to issue stock or shares at the time the award vests. An award will vest when all the conditions laid down to be satisfied before the stock or shares may be issued have been met, e.g. the required duration of time, period of employment, or performance criteria. Again, the particular facts of any award, rather than its label, will determine the correct tax treatment.

No shares are delivered until the employee satisfies the vesting schedule. The vesting schedule will set out when, and to what extent, the RSUs will vest: for example, 20% per year over five years. At each vesting date, employees will receive company stock equal to the net value of the RSUs which have vested. Companies use units instead of the actual restricted stock or shares, because they can:

  1. postpone shareholder dilution until the time of vesting;
  2. get consistent tax treatment and timing internationally; and
  3. even if the share price falls after the award date, the RSU still retains some value, unlike a market value share option.

None of these advantages are of course peculiar to RSU plans. But foreign corporations in particular like to structure their incentive plans using them.

RSUs may give rise to:

  • acquisition of securities; or sometimes
  • the payment of a cash equivalent to securities.

RSUs that provide securities on vesting

Until 5 April 2016, normally the securities would be taxed as money’s worth under ITEPA03/S62 (see ERSM20500) when they were acquired and the grant of the RSU would not be money’s worth. For further discussion of RSUs and money’s worth, see ERSM110015.

Where the money’s worth charge did not apply at vesting there were two further provisions which could be used to tax the vesting gains made. They were:

  • Chapter 5 (securities option) because the RSU may be a right to acquire securities - see ERSM110500; or
  • Chapter 3C (securities acquired for less than market value) - see ERSM70010.

Until 5 April 2015 the residence position of the employee may also be an important factor. See ERSM70450. From 6 April 2015 this is no longer the case. See ERSM162000.

From 6 April 2016, for all securities options – regardless of whether or not they are ‘legal options’ – the acquisition of securities pursuant to the option will be taxed under Chapter 5 of Part 7 (see ERSM110015) and not as earnings. So RSUs which do confer upon the recipient a right to acquire securities - see ERSM110500 – will be taxed under Chapter 5.

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RSUs that provide cash on vesting

A right to acquire the cash equivalent of securities under such an arrangement is not a security (nor a securities option). It is a type of phantom share plan. See ERSM20196.

ERSM110020 and ERSM110025 deal with variants of plans that convey a right to acquire securities or cash where the employee or employer have some leeway to substitute cash or securities, as appropriate.