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HMRC internal manual

Employment Related Securities Manual

Employment-related securities and options: what are securities: Stock Appreciation Rights (SARs)

This type of scheme is quite common in American companies and may also be called ‘Equity Appreciation Rights’ or a ‘Phantom Share (Option) Scheme’.

A stock appreciation right (SAR) is similar to a right under a phantom share plan (see ERSM20196) in that it provides the right to the monetary equivalent of the increase in the value of a specified number of shares over a specified period of time. Normally, it is a way of paying a cash bonus based on the happening of an event or passage of time. As with other forms of employee awards, the particular facts of each award will determine the correct tax treatment.

A SAR is normally paid out in cash, but it could be paid in shares in certain limited circumstances. (See ERSM110025  on whether such awards are securities options.) The date of payout may not be fixed, but may be any time after the SAR vests. One of the advantages of these plans for businesses is their flexibility. Because of this the details of any plan are likely to differ from company to company.

Consistent with the treatment of phantom share plans, the employee will be taxed when the right to the benefit under the SAR is enjoyed. In the case of cash this is when the cash is received or otherwise made available to the employee. At that point the value of the award minus, exceptionally, any consideration paid for it is taxed as general earnings. If the award is settled in shares (as might occasionally occur), the money’s worth of the award is taxable on acquisition of the shares, even if the shares are not sold at that point.

Tandem SARs

SARs are often granted in tandem with real share options to help finance the purchase of the options and/or pay tax if any is due upon exercise - hence the term “tandem SAR”. The SAR should be taxed as general earnings and the share option taxed under Chapter 5 - see ERSM110500.