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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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Employment-related securities and options: ways of getting shares

Employees may receive shares in many different ways and under schemes of different types. Apart from share option schemes and share schemes approved by HMRC, the ways in which employees receive shares include:

  • a formal employee share scheme which has not been approved by HMRC,
  • a ‘one-off’ share offer made either to all employees, to a selected group, or to a single employee, or
  • under the terms of a service agreement.

The shares may be made available by:

  • the company issuing new shares which are then allotted to the employees,
  • the employing company setting up an employee benefit trust (EBT) and providing for shares to be transferred to employees via the EBT,
  • another shareholder making shares available to employees in general or to a specific employee.

The shares the employee receives may be shares in the company that employs him or her, or shares in another company in the same group - often the parent company. Shares an employee receives in an unconnected company may also produce an emolument if they were received by reason of the employment.

In all these cases, if the shares the employee receives are worth more than he or she paid for them, there is almost certain to be an employment income charge.

Types of share scheme

Where shares have been received under a formal share scheme not approved by HMRC it is possible to identify some broad types of schemes:

  • free share schemes The shares are given to employees for no payment either free of any restrictions, or carry restrictions, for example, which prevent them from being sold for a period of time.
  • share purchase schemes The shares are purchased by employees at a discount from the market value. The shares are either free of any restrictions, or carry restrictions which prevent them from being sold for a period of time.
  • share incentive plans The employee is promised or allocated a certain number of shares, but does not become entitled to the shares until the conditions set out are satisfied. These schemes are often called Long Term Incentive Plans or LTIPs, although the term is also used for other types of schemes.
  • restricted share schemes subject to risk of forfeiture These schemes provide shares to the employee on terms that the shares may be forfeit at some time in the future. The employee is entitled to the shares when they are provided and may also be entitled to dividends and voting rights, although the shares themselves will normally be held in a trust on terms which prevent the employee from selling them while they can still be forfeited.