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We Speak Your Language! Jones Day has locations in centers of business and finance on five continents. We have translated information on the Firm into 10 languages, including languages native to our locations in Europe, Asia, and Latin America. Look Before You Leap! A Primer on Employee Stock Incentive Plans in the UK. Featured Publications Read our new series of articles about Autonomous Vehicles. Read continuing information about Brexit. Read our insights on the Trump Administration. A Primer on Employee Stock Incentive Plans in the UK November Author s John J.

Look Before You Leap. Explore Why We Are Different Lawyers at Jones Day find out very quickly that our commitment to teamwork is real. Explore Our Offices by Country Australia Belgium Brazil China France Germany Hong Kong Italy Japan Mexico. Russia Saudi Arabia Singapore Spain Taiwan The Netherlands United Arab Emirates United Kingdom United States. Read our new series of articles about Autonomous Vehicles. A Primer on Employee Stock Incentive Plans in the UK November US companies often use their existing US stock based incentive plans to grant options, restricted shares, restricted stock units and other forms of performance incentive to employees in different jurisdictions, including the UK.

This Commentary provides a brief overview of some of the main considerations and pitfalls in extending such plans to the UK, although specific advice will be needed on each plan. Securities laws Investor protection. The UK Financial Services and Markets Act regulates, amongst other things, the sale of shares and other securities in the UK. Breach of the investor protection laws in the UK is a criminal offence. Approval of documentation by an authorised person is both time consuming and expensive.

A company should consider adopting a UK sub-plan i. The Directive applies to offers of securities that are transferable and negotiable on a regulated market and, in the context of employee awards, it is the incentive awards and not the underlying stock which are considered to be securities. Consequently, stock option, restricted share and restricted stock unit awards which are not unconditional share awards should not fall within the prospectus requirements if the awards themselves are not transferable by the employee and not negotiable on a regulated market.

Other forms of stock purchase plan may well fall within the prospectus requirements. Taxation This is a very broad overview of UK taxation of certain common US stock incentives, particularly stock options and restricted stock. UK equivalents of the US incentive stock option regime are less generous and will require UK plans or sub-plans to be set up to meet UK Revenue requirements. Gains realised by employees from stock incentives will either be subject to regular income tax or to capital gains tax.

Taxation on grant of stock awards. If stock is readily convertible to cash e. An employee stock option including a right to stock that will automatically vest on a certain date or on the occurrence of a specified event , will not give rise to income tax or NIC provided that the employee stock option is not treated as a different kind of security which is taxable on receipt.

For example, the payment of dividend equivalents will probably mean that the option is a taxable security, leading to an ordinary income tax charge at the time of grant. Where an award of company stock is subject to vesting requirements, ordinary income tax is charged when the stock award becomes vested. In the case of an ordinary stock option, therefore, taxation occurs only when the option is exercised.

In the case of any other stock award which vests without exercise, ordinary income tax applies at the date of vesting.

In most cases, NIC will also be chargeable. Where, however, the stock is acquired subject to restrictions, the tax consequences are complicated by the restricted securities income tax charge. See relevant section below.

Taxation on sale of stock. This is calculated as the difference between the sale proceeds and the amounts paid for the stock plus amounts already subject to income tax. An ownership period of two years will secure maximum taper relief, with the rate of CGT falling from 40 percent to 10 percent. The restricted securities regime described below may also impact at the point of sale.

Restricted securities income tax charge. The ordinary income tax imposed will be on a proportion of the proceeds of sale if they are disposed of whilst still restricted or on a proportion of their value at the time restrictions fall away. The proportion of the subsequent gain chargeable to ordinary income tax is equal to the same proportion as the discount to the IUMV.

If no election is made, as the shares rise in value, a larger proportion of the subsequent gain will therefore be chargeable to the less favourable income tax regime. On a profitable disposal, it would clearly be preferable for any gain to fall under the CGT regime i. It is possible to elect for ordinary income tax and NIC to be paid on the IUMV of the stock when it is acquired by means of a formal joint election signed by employer and employee before or within 14 days of the stock acquisition.

If the employee pays tax on the difference between the price paid and the IUMV of the stock, any later growth in value will fall into the CGT regime. For the employee, however, there is the risk that the income tax and NIC paid at the outset would be wasted if the stock did not vest or the value fell over the restricted period, because there is no clawback or income tax set off of any such losses.

If stock will be forfeited for less than market value under certain circumstances, but these restrictions will fall away within five years of the award date, the restricted securities income tax charge and any other income tax charge that would normally have arisen at grant will not arise until the restrictions fall away, unless an election is made up front on the full IUMV of the stock.

Although for accounting purposes the cost of the stock benefits will be accounted for over the vesting life of the benefit in accordance with the international accounting standard, IFRS 2 , the deductibility of such costs for tax purposes is governed by different rules. The first requirement is that the business for the purposes of which the award is made whether a UK company or a permanent establishment of a foreign company in the UK must be within the charge to UK corporation tax.

The second requirement is that the shares to which the award relates must be i listed on a recognised stock exchange which includes most major stock exchanges, but not the AIM exchange operated by the London Stock Exchange , or ii in a company not under the control of another company, or iii in a company under the control of another company whose shares are listed on a recognised stock exchange subject to certain exceptions.

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Finally, the recipient of the award must be within the charge to UK income tax. If these conditions are satisfied, the employing company will be entitled to deduct the cost of the award at the time that the recipient receives the stock. The amount of the deduction is equal to the difference between the market value of the stock on receipt and any consideration given for the stock. No deductions are allowed for other related costs of operating the stock plan. Specific UK advice should be sought on the availability of this relief.

Revenue approved plans There are a number of UK Revenue approved plans which a company may want to consider as the approved plan may mitigate some of the tax consequences described above. Specific legal advice should be obtained to determine whether or not such plans may be made available over the parent company stock.

Labour laws There is a wide range of anti-discrimination laws in the UK covering sex, race, sexual orientation, disability, religious belief, age and employees on part-time or fixed term contracts. Any company stock grant which is tainted by an act of discrimination may give rise to a cause of action, even though the plan is likely to be governed by US law.

An example of potential issues that can arise is demonstrated by the recently introduced UK age discrimination laws. US award agreements also often provide that vested stock or the proceeds of stock sold may be recovered in the event of employee misconduct, for example where the employee breaches an anti-competition agreement with the company. There is some doubt as to the enforceability of these restrictions from a UK labour law perspective. Conclusions In the context of UK securities laws, be aware that company stock plans available to non-employees, or which may pay out benefits in the form of cash, need careful review if the intention is to use them for UK employees.

You also need to check whether a prospectus may be required. A careful review of company stock grant documentation will be needed to put the appropriate mechanism in place for the recovery and payment of tax on awards. The correct categorisation of the type of award for tax purposes is critical. Further information For further information please contact your principal Firm representative or one of the lawyers listed below.

The contents are for general information purposes only and are intended to raise your awareness of certain issues as at November under the laws of England and Wales. This Commentary is not comprehensive or a substitute for proper advice, which should always be taken for particular queries.

It may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing of this publication is not intended to create, and receipt of it does not constitute, a solicitor-client relationship. The views expressed herein are the personal views of the authors and do not necessarily reflect those of the Firm.