Under a share acquisition plan, employees can either buy shares in their employer for their full market value or can be awarded those shares at a discount.
Actual shares acquired under a share acquisition plan might be preferable to share options if having shareholder status is important or if the aim is for employees to immediately enjoy shareholder rights such as votes and dividends.
Where share acquisition plan shares are awarded at a discount to their market value, income tax (and possibly also National Insurance contributions (“NIC”) will arise.
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Due to the fact that a share acquisition plan will require payment for the shares and/or give rise to tax liabilities, share acquisition plans are likely only to be relevant where the market value of the shares is relatively low or where employees are required to take some investment risk.
Where no such investment risk is required and share values are meaningful, it is likely to be appropriate to look at other forms of share incentive (in particular, EMI, partly paid share plans or growth shares).
Under a share acquisition plan employees acquire an immediate stake in the business they work for or another company within the group. Employees can therefore enjoy shareholder rights, including votes and dividends as well as benefiting from shareholder status.
It is open to the company, however, to determine the relevant rights and restrictions that apply to the share acquisition plan. Share acquisition plans are therefore extremely flexible with the ability to impose additional performance targets and conditions on the share acquisition plan shares. Share acquisition plan shares will usually also be made subject to leaver provisions so that the employee forfeits his or her SAP shares when they leave the business. These elements help to enhance the incentive and retention impact of a share acquisition plan.
Provided that the employee agrees to pay the full unrestricted market value (“UMV”) for the SAP shares or elects to pay tax by reference to that UMV, there should be no further income tax or NIC for either the employee or employer on any future growth in value of the shares above that initial UMV.
Importantly, any such future growth in value of the SAP shares above the initial UMV should be subject to the more beneficial rates of capital gains tax (0%-20%) in the employee’s hands and with no employer’s NIC for the company.
For these reasons, SAPs work well where either:
the current value of the shares is low; or
there is a requirement for the employee to have “skin in the game” – either through investing to buy the SAP shares or suffering tax up-front on the acquisition of those shares.
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Under a share acquisition plan employees will either be required to pay the full UMV for the shares or suffer a tax (and possibly NIC) liability on any discount to the UMV on those shares.
Share acquisition plans will therefore require an investment for the shares or give rise to what is often referred to as a “dry income tax charge” (i.e. tax being triggered before any value has been derived by the employee for the SAP shares).
Unless there is a requirement for such investment, using a share acquisition plan is unlikely to be feasible where the shares have a significant current UMV.
Due to the need to pay the UMV of the shares or suffer tax on their UMV, a share acquisition plan may well have a higher risk profile and buy-in cost than an employee share option; where if the share price falls an employee does not have to exercise his or her rights.