The Share Schemes Manual (ERSM) contains full guidance about
schemes that involve the actual transfer of shares to employees.
However, some employers set up incentive schemes that involve
the award of 'phantom' or hypothetical shares. In schemes of this
type the employee is given an award which represents a specified
number of units, or shares, in the employer's company. At the time
of the initial award the employee does not receive money, or any
form of 'money's worth' (see
EIM00530). There is no payment of
earnings, and so no charge to tax on employment income at the time
of the initial award. All the employee actually gets is the
prospect of receiving a cash payment at some time in the future.
The employer's object is to encourage the employee to
continue in the employment, and to provide an incentive for the
employee to work well, by holding out the prospect of a future
bonus payment linked to the value of the company's shares.
The details may vary from scheme to scheme. Typically, and
provided that the employee remains with the company, he or she
eventually receives a cash payment equal to the value of the
'phantom' shares at the time of payment. This is likely to be
greater than the value at the time of the original award. The cash
payment is taxable as earnings within Section 62 ITEPA 2003 in the
year that the employee receives it. It is usually, though not
invariably, earnings for that year. This will depend upon the
scheme rules. See Section 16 ITEPA 2003.
See ERSM110020 for more information on how phantom share
schemes are viewed from the perspective of employer share
schemes.
