Employee share incentive schemes can be a cost-effective way of rewarding employees whilst encouraging loyalty. Usually, shares or options vest over a period of time in accordance with the terms of the relevant scheme. Share incentives also give employees the opportunity to benefit from growth in the company and to receive dividends once their awards vest or they exercise their options and acquire actual shares – they literally become “invested” in the business doing well.
The term “share incentives” usually refers to either share options or awards of conditional shares. Share options are rights under a contract whereby an employee can elect at a future date to purchase shares at a pre-determined “strike” price. An award of conditional shares, on the other hand, refers to an enforceable promise by the employer that the employee will receive a future reward in the form of shares, generally subject to conditions (hence the name) relating to individual performance and/or attainment of a period of service.
Share incentives may also be offered on terms that reflect specific milestones or events relating to the company more generally eg so as to reward senior executives when financial performance exceeds certain targets or on the sale of the business. The use of share incentives can additionally be a way of providing value without depleting the company’s cash reserves (compared with a ‘regular’ bonus for example).
Usually, the tax implications of incentives will be a key consideration in their design to make them attractive to employees whilst also achieving the company’s objectives.
The types of share-related reward that we tend to see typically take one of the following forms:-
- approved savings-related share option scheme
- approved profit-sharing scheme
- long-term incentive plan – often involving restricted shares or performance shares
- employee benefit trust
Offering Share Incentives to Isle of Man Employees
The Isle of Man has its own legislation and revenue authority (the Isle of Man Treasury) as well as separate income tax and National Insurance systems.
We can advise on obtaining approval for different types of share scheme from the Isle of Man Treasury so that participating employees can do so on a tax-advantaged basis and/or on the income tax and social security implications of providing certain benefits that do not conform to the rules for “approved” share incentive schemes. We would always recommend that employers take advice to ensure that share incentives achieve the desired legal effects and so that the correct income tax and National Insurance analysis is applied.
Given the Isle of Man’s links to other finance centres and the multi-jurisdictional basis on which a number of our clients operate, it is often the case that employers propose to offer rewards involving shares or securities of an overseas parent or other group company. We are happy to advise on how share incentives are likely to be treated from an Isle of Man legal perspective and to work with specialist tax advisers on more complex or less usual incentive arrangements that may not be directly analogous to typical Isle of Man or UK arrangements. We will be happy to discuss client requirements relating to benefits and remuneration, something which may be of particular relevance on relocations where the employer does not already have an Isle of Man place of business/local personnel engaged.
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Useful Resources:-
PN27/89 – https://www.gov.im/media/514579/pn_27_89.pdf
GN40 (Expenses and Benefits in Kind Guide 2024/2025) – https://www.gov.im/media/1384064/benefit-in-kind-guide-tax-year-2024-25_compressed.pdf
