Many US companies that operate their ESPP and stock option plans globally will choose to roll out the same plan in each jurisdiction, making changes only where required under local laws. However, recent changes in the law relating to tax approved plans in the UK may cause companies to reconsider this approach with respect to their UK employees. If a tax approved plan can be operated in the UK, there are clear and significant benefits for both the employees and employer.
ESPP vs SAYE or SIP
The tax approved plan regime in the UK does not provide for an exact replica of an ESPP, but there are features of both the SAYE plan and Share Incentive Plan (SIP) that are similar. Both the SAYE and SIP are ‘all-employee’ plans, though companies can impose a qualifying period of service.
Key features of SAYE
- Monthly savings of up to £500 through payroll deductions
- Three or five year savings period
- Exercise price at a discount of up to 20% of market value at grant
- Exercise generally free of income tax and social security
Key features of SIP
- Monthly or one-off pre-tax payroll deductions
- Companies can accumulate deductions over a purchase period of up to one year.
- Companies can also offer matching shares to replicate a discount
- Limit on share purchase of £1,800 per year (with a limit on matching shares of 2:1)
- Shares can be free of income tax, social security and capital gains tax if they are held in the plan for at least five years
A US company could choose either an SAYE or SIP to replicate some of the benefits of its ESPP. An SAYE plan may be more suited for a company that has a longer purchase period under its ESPP, whereas a SIP may be used if share purchases occur more regularly.
The key challenges for US companies operating an SAYE plan or a SIP will be the administration involved. Savings under an SAYE will need to be held in a UK bank account, and shares purchased under a SIP need to be held in a UK resident trust. The level of administration involved in operating a SIP is one of the reasons why the SAYE is more popular amongst UK listed companies.
ISO vs CSOP
The CSOP is a tax efficient option plan that can be operated on a discretionary basis, and therefore there are many similarities with ISOs. A US company intending to grant options to UK employees under a CSOP should have to make relatively few changes to the option terms or the way it operates the plan. The key features of a CSOP are:
- Exercise price must not be less than market value at grant
- Limit of £30,000 on the value of shares under options granted to any one employee
- Exercise is free of income tax and social security if more than three years after grant
- Corporate tax deduction may be available for the employing company on the option spread at exercise
It is also now much simpler to put in place a CSOP as it is no longer necessary to obtain specific approval from the UK tax authorities. However, a CSOP still needs to comply with the various statutory requirements.