Shares incentive plans are explained in the Employment Related
Securities Manual (see Chapter 6 of Part 7 of, and Schedule 2 to
ITEPA03, and ERSM330000). SIPs are designed to encourage employee
share ownership. Shares acquired or awarded under the plan are held
on behalf of the scheme participant by the scheme trustees, who
receive any dividends paid under the scheme. Cash dividends may be
reinvested in further shares and are called ‘dividend
shares’. These are exempt from income tax under
ITTOIA05/S392 to S396 form part of the SIP code. The sections set out the tax charge that arises if:
Section 392 sets out the tax charge, which applies only if the
participant has benefited from the tax advantages of an approved
SIP. Under section 393 any amount not reinvested is taxed (and any
entitlement to tax credit is determined) for the tax year in which
the dividend is paid over to the scheme participant rather than the
year in which it was originally paid. The scheme may only hold on
to a cash dividend and carry it forward for three years from the
date of payment.
Under section 394 the participant is treated as receiving a distribution in the year in which the shares cease to be subject to the SIP within three years of acquisition. Unlike section 393 this is a further distribution not a postponement of the original charge. Section 395 reduces the charge if tax has been paid on capital receipts in respect of plan shares.
There are equivalent rules for SIPs involving shares in non-UK resident companies in ITTOIA05/S405 to S408.