Freshfields Bruckhaus Deringer llp Finance Act 2013: changes to HMRC
approved share plans
The Finance Act 2013 (FA13) has made a number of amendments to the legislation regulating
HMRC approved share plans, ie the Sharesave (SAYE), the Share Incentive Plan (SIP) and the
Company Share Option Plan (CSOP). Some of these amendments are important and require
• amending plan rules and supporting documentation to reflect changes made by the
• formulating a policy on retirement.
In the majority of cases share plans are updated automatically by FA13, which took effect on
17 July 2013. Companies should, however, amend their rules so that they accurately reflect
the revised legislation.
This briefing sets out the key changes made by FA13 and indicates which plans are affected.
Removal of the requirement to include a ‘specified age’ for retirement
(affects SAYE, SIP and CSOP)
Prior to FA13 companies were required to include a ‘specified age’ for retirement in SAYE
plans, SIPs and CSOPs. Companies needed to select an age within an age range (which
differed according to the type of plan, being a minimum age of 50, 55 and 60 for SIP, CSOP
and SAYE respectively). Your plan rules will state the specified age. From this age retirees are
entitled to tax favoured treatment of their options and SIP awards.
FA13 removes this requirement (although the specified age will remain relevant in one
respect for SAYE, as discussed below). Although this may broaden good leaver status for
participants, it will cause a headache for companies for the reasons explained below.
Removal of the ‘specified age’ means that SAYE options will now become exercisable when a
participant leaves employment on retirement irrespective of the participant’s age. What
retirement means is discussed below. Such an exercise will be tax favoured (ie no income tax
will arise). The current ‘specified age’ will have a continuing relevance for pre-July 2013 SAYE
options, which may still be exercised when a participant reaches the plan’s specified age
without retiring. This right will not be available to any new SAYE options granted.
Likewise, CSOP options will no longer be subject to an income tax charge if they are
exercised (within three years after grant) after the participant leaves employment because of
retirement, irrespective of the participant’s age.
Finance Act 2013:
changes to HMRC
approved share plans
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E email@example.comFinance Act 2013: changes to HMRC
approved share plans
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Finally, SIP shares will not be taxed if they are removed from the plan after the participant
leaves employment on retirement, irrespective of the participant’s age. Free and matching
shares cannot be forfeitable in these circumstances (previously they could be forfeitable on
retirement before the specified age).
For the reasons explained below FA13’s removal of the ‘specified age’ for SAYE, SIP and CSOP
is counter-intuitive in light of legal risks on age discrimination, and will cause some
problems for companies.
Retirement has been a tricky area for companies since it became unlawful (in 2006) to
discriminate against employees on grounds of age without either a specific legislative
exception or an objective justification – that is, by showing that the discrimination is a
‘proportionate means of achieving a legitimate aim’. Age discrimination concerns became
more acute for employers following the abolition of the default retirement age (65) in 2011.
Prior to FA13 the ‘good leaver’ status of retirees under approved share plans was inherently
age discriminatory, because older retirees’ options were treated more favourably than those
of younger leavers – both in respect of the ability to exercise and with regard to tax.
(Remember that age discrimination legislation protects the young from discrimination
favouring the old as well as protecting the old from discrimination favouring the young.)
The legislative requirement to include a ‘specified age’ gave companies a partial safe-harbour
from age discrimination risks (age discrimination is permitted if required by statute), and
companies were generally able to objectively justify their choice of specified age within the
Following FA13 companies are put in a much more difficult position. With no statutory
definition of ‘retirement’, and no ability to adopt a specified age under the previous
legislation, there is no safe-harbour to rely on. Instead, companies must be able to justify any
age discrimination objectively and so must develop their own policy on the meaning of
retirement for approved plans. This is not straightforward, because leavers are likely to use
age discrimination arguments to press companies to treat them as retirees and so be
permitted to exercise and qualify for favourable tax treatment.
As a result companies wishing to minimise the age discrimination risk may consider
applying retirement broadly among leavers, by treating retirement as applying from a fairly
low age (eg 50). This would have the potential benefit of more leavers being classified as
retirees (and thus eligible to exercise and benefit from tax favoured treatment). Some
companies may not consider this to be in shareholders’ interests as an appropriate use of
equity for incentivisation purposes.
But too liberal an interpretation of ‘retiree’ may be subject to challenge by HMRC, who may
consider that the company is over-egging the age discrimination risk and that leavers are
being treated as retirees solely for the purpose of gaining tax advantages. HMRC are likely to
query decisions to treat leavers as retirees solely for the purposes of the share plans where
they are not retirees in other contexts.
HMRC guidance has recently been published but it does not really assist in view of the
difficult legal issues involved: HMRC do not provide examples of retirement, nor will
they give rulings on the subject. They are, however, clear that the policy should not be
applied on a discretionary basis (ie the policy should be applied consistently in relation to
all participants). Companies find themselves, therefore, in a difficult position: they must
develop a policy for retirees that strikes a balance between minimising the risks of unlawful
age discrimination and challenge from HMRC.
Broadly, there are two main ways to approach a retirement policy:
• a company may determine that all leavers over a certain age are retirees – although
careful consideration is needed to determine that age; or
• a company may set a suite of conditions, a certain number of which must be satisfied in
order for a leaver to be treated as a retiree. A minimum age may be one of the conditions,
but other conditions might include, for example, the employee’s anticipated future
Prior to FA13 the
‘good leaver’ status of
approved share plans
was inherently age
discriminatory.Finance Act 2013: changes to HMRC
approved share plans
Freshfields Bruckhaus Deringer llp 3
The age element of a retirement policy will vary from business to business, but examples of
what a company may decide is appropriate include the following:
• carrying out an analysis of the workforce to establish the age at which employees have
typically retired in recent years;
• retaining the pre-FA13 ‘specified age’ (although this could cause inconsistencies between
SAYEs, SIPs and CSOPs, as each of these plans had a different earliest age for the ‘specified
• using an appropriate age from another context, eg the youngest age at which an employee
may draw a pension (other than for ill health) under the company’s relevant pension plan.
Legislation permits this to be as early as 55 (or 50 for certain employees who have
protected pension ages), but retirement before the employee’s normal pension age (eg 60)
will generally require employer consent.
It will generally be inadvisable to use the age at which an employee can claim a state pension
(currently ranging from 61 to 68, depending on age now and gender), as this would be very
unattractive for employees, ie too few would get the benefit of retirement status.
Companies should not delay in writing their policy on the meaning of retirement for these
purposes. This will help them to demonstrate that there is an objective justification (ie a
proportionate means of achieving a legitimate aim) for any potential age discrimination.
For the same reason, they should also ensure that they document particular decisions
Participants leaving the parent group on a TUPE transfer/sale of a
subsidiary out of the group (affects SAYE and CSOP)
Prior to FA13, holders of SAYE and CSOP options had the ability to exercise on leaving
employment either because of a TUPE transfer or because the participant’s employing
subsidiary was sold out of the group. But such exercise was not tax favoured.
Following the changes made by FA13 SAYE and CSOP options exercised in these
circumstances will be tax favoured.
In practice, tax favoured treatment following TUPE transfers is just a clarification, because
case law permitted TUPE leavers to be treated as redundant for the purposes of the share
plans (following Chapman and Elkin v CPS Computer Group plc).
Tax reliefs on a takeover of the Plc (affects SAYE, SIP and CSOP)
FA13 extends tax relief to most cash takeovers (ie where the participant remains in
employment but there is a cash takeover of the company whose shares are used for the plan)
provided certain conditions are met. Prior to FA13 tax favoured exercise of an option would
not have been available before the third anniversary of grant, and there was no tax favoured
treatment on removal of SIP shares from the plan.
There are some limitations to the FA13 regime, including requirements that:
• the participant must receive cash (and no other assets) in exchange for the shares. Tax
favoured treatment will, therefore, be lost if the takeover offer includes shares in the
offeror as all or part of the consideration;
• the proposal to option holders under the takeover offer does not include an ability
• there must not have been any arrangements for the takeover in place or under
consideration when the option/SIP award was granted; and
• in the case of an option, tax avoidance was not one of the main purposes for the
arrangements under which the option was either granted or exercised.
Removal of the limit on dividend reinvestment (affects SIP only)
Prior to FA13, dividend reinvestment under a SIP (which allowed participants to purchase tax
favoured dividend shares with dividends accruing on their shares within the SIP) was limited
to £1,500 per annum. This cap has been removed by FA13 so there is no longer a limit on
dividend reinvestment for tax years from 2013/2014.
Following the changes
made by FA13 SAYE
and CSOP options
exercised in these
circumstances will be
tax favoured.Antitrust damage claims
and collective actions in Europe
4 Freshfields Bruckhaus Deringer llp
Companies are permitted to impose a cap (or a method for determining a cap) on dividend
reinvestment. In practice, companies are unlikely to want to do this except in limited
circumstances (such as when they need to impose a limit because of prospectus rules).
Although FA13 automatically makes changes to SIP rules, free/partnership share agreements
entered into by SIP participants are likely expressly to cap dividend reinvestment at £1,500
per annum (rather than by reference to any cap in the legislation from time to time). If this is
the case, companies must expressly inform participants in order to remove the cap under
existing free/partnership share agreements. New free/partnership share agreements must
also reflect the removal of the limit.
Removal of the prohibition on use of restricted shares (affects SAYE, SIP
Prior to FA13 companies were prohibited from using ‘restricted’ shares in an SAYE, SIP or
CSOP (except in limited circumstances). FA13 removes this prohibition.
This will be of most value to unlisted companies, but listed companies may also be able to
make use of the increased flexibility. For example, a company may consider imposing a
post-exercise holding period for shares acquired under CSOP or SAYE. Or it may make free or
matching SIP shares subject to a longer forfeiture period than was permitted prior to FA13, or
make good leavers’ free or matching SIP shares subject to forfeiture (although we would
expect most companies to keep the SIP forfeiture period and terms in line with the tax
regime, and keep the period at three years and allow good leavers to retain their shares).
Note that companies are still prohibited from making partnership shares or dividend shares
under a SIP subject to forfeiture.
Valuation of partnership shares (affects SIP only)
Some companies use an accumulation period (typically a year), during which deductions
made from salary roll-up are used to purchase partnership shares at the end of that period.
Prior to FA13 companies had to determine the number of partnership shares to be awarded at
the end of an accumulation period by reference to the lower of the market value of the shares
at the beginning of the accumulation period and at the end of the period, when the
partnership shares are actually purchased. This did not allow companies to hedge their cost
exposures. Following FA13 companies may choose to use the value at the beginning or the
end of the accumulation period, or the lower of the two.
In principle this change may make accumulation periods more attractive, as companies can
now create certainty as to the cost of acquiring the shares and can hedge that cost exposure
if they wish to do so. In practice companies that currently operate SIPs with monthly
purchases are likely to continue to do so, as employees are likely to be distrustful of
deductions being made from salary when shares are not bought straightaway.
Companies must inform participants which of the three valuation methods has been chosen.
This must be set out in the partnership share agreement, meaning that any future
partnership share agreement must be updated accordingly.
In addition, there are some amendments of a more technical nature, which generally offer
greater flexibility to companies. The changes are generally incorporated automatically into
plan rules by FA13, but companies should still update their rules.
• The prohibition on SAYE and SIP participants having a ‘material interest’ (ie broadly a
25 per cent shareholding interest) in a close company has been abolished. Employees with
such a major shareholding may now participate in an SAYE or SIP on the same terms as
any other employee. The material interest rules have also been revised for CSOP, so that
options may be granted to employees who have beneficial ownership of, or the ability to
control, up to 30 per cent of a company’s share capital. This has been increased from
25 per cent.
Some companies use
a year), during
made from salary
roll-up are used to
shares at the end of
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• FA13 makes amendments to the terminology and legislative references describing the
ways in which the listed company may be taken over, eg whether pursuant to a general
offer, scheme of arrangement, etc.. Although these changes will not affect the day-to-day
operation of a share plan, they are likely to be important if there is a takeover of Plc.
• The seven-year savings contract that was previously available under SAYE has been
abolished. Companies may now use only three- or five-year savings contracts. As a
housekeeping exercise, references to seven-year savings contracts should be removed
from the plan rules.
Companies need to take the following action:
• determine their policy for retirees. As discussed in paragraph 1 above, companies need to
develop a policy for retirees that strikes a balance between minimising the risks of
unlawful age discrimination and challenge from HMRC;
• amend their share plan rules so that they accurately reflect changes made by FA13. The
majority of changes are made automatically by FA13, but any new documents need to
reflect the updates (for example, future free share agreements under a SIP – see
paragraph 4 above). These amendments can generally be made by the board without the
need for shareholder approval. This is because most rules specify that where
amendments are to take advantage of any changes in legislation or to maintain or obtain
favourable tax treatment, shareholder approval is not required (even if the amendments
are in favour of participants);
• review any tax communications to participants to ensure they accurately reflect
revisions to the tax treatment in relevant circumstances; and
• this may be an appropriate time to carry out a more general health-check on plan rules.
This may be an
appropriate time to
carry out a more
on plan rules.
For more information please contact:
T +44 7710 553 038
T +44 7971 894 138
T +44 7710 606 914
T +44 7590 738 200