The Revenue-approved Share Incentive Plan (SIP) is a tax effective way for companies to award shares to their employees and many companies have now put these in place. When an employee has held his Share Incentive Plan (SIP) shares for five years or more, he may transfer or sell them without an income tax or capital gains tax charge ie tax-free.
However, if he transfers them into Revenue approved pension arrangements (including self-investment personal pension arrangements or SIPPs) he will receive another benefit in that he will receive tax relief on that contribution based on the market value of the shares at that time. The employee may either do this using his own arrangements or through a corporate SIPP facilitated by the employer.
Tax relief means an extra 22% of the value of the shares on transfer will be contributed to the SIPP pension arrangement and a higher rate taxpayer will recover an additional 18% relief through his tax return.
Accordingly, the employee has received a 40% uplift just by moving the shares from one "plan" to another.
Other benefits of transferring to a SIPP include:
- Dividends. Dividends on shares held with a SIP are taxable. For a basic rate taxpayer, this means no additional tax is payable nor any extra tax reporting requirements, but for a higher rate taxpayer, further tax can be payable and this also has to be reported on a tax return. Dividends can be received tax free within a SIPP and do not need to feature on a tax return. Holding through a SIPP can therefore be much simpler - although the position would be more complicated with non-UK shares.
- Diversification. SIPs only hold employer shares. SIPPs can be invested more widely, meaning that SIP shares can be transferred into a SIPP and then immediately sold with the proceeds used for wider investment spread.
- No loss for cash for employee. Contributions out of cash salary can often leave an employee short of cash for other commitments. The advantage of a SIP transfer is that the value of these shares is already an investment and so it makes no difference to an employee's cash-flow or disposable income.
There can be some difficult points to consider, however:
- Not always available. Not all SIP providers yet offer the possibility of direct transfer.
- Taxation consequences. If the shares stay in the SIP, the employee can realise them tax-free at any time after the fifth anniversary of acquisition. Once the shares are held in the SIPP, the employee can only realise 25% tax-free; the balance will be received as taxable pension income.
- Costs. SIPs cannot charge employees for the administration costs of a SIP, which have to be borne by employers. SIPPs may charge, however - either on an asset basis or in other ways. An employee would have to take these new costs into account.
- ISAs. Normally only cash can be contributed to an ISA, but SIP shares can exceptionally be transferred directly into an ISA (though without tax relief for the contribution) and then sold within the ISA to allow tax-free income to be received and tax-free capital growth. So SIPPs are not the only mechanism for diversified tax-free growth: ISAs should also be considered.
- Unquoted shares. Although SIPPs are permitted to hold unquoted shares, some unquoted shares which can be held within a SIP cannot be held within a SIPP.
- Alignment. Many employers support the underlying rationale beneath SIPs which is that employees' financial interests are aligned with the company's through the continued holding of company shares. While employees cannot be prevented from transferring their SIP shares into SIPPs, where they can then diversify, employers might not wish to facilitate or draw employees' attention to diversification.
- Other types of contribution. The employee would receive just as much tax relief if he made a contribution out of salary. There is no special tax relief just because the contribution is made with SIP shares. Indeed, an employer and employee are better off if the contribution is made from normal income than as a SIP transfer because salary sacrifice should also reduce National Insurance contributions which saves costs all round.
- Administration. SIPP transfers can be relatively easy to manage if an employee is transferring SIP shares on an annual basis ie has received free shares under a SIP. However, partnership SIP shares are often bought monthly. Fifth anniversaries of acquisitions would therefore also occur monthly, meaning that transfers from SIP to SIPP could occur on a monthly basis, which could lead to complicated and costly administrative issues.
However, as more and more companies require their employees to make their own personal financial provisions in retirement and employees increasingly expect employers to facilitate this through giving them access to schemes or advice, companies at the very least should think about whether to advertise the possibility of "SIP to SIPP" transfer, while leaving it to employees whether to make the decision.
