ERSM110020 - Securities Options: what are securities options - phantom scheme variants

Phantom options: pure cash schemes (See also ERSM20196)

A typical phantom share plan will mirror a real share plan - for example using terms used in real plans - such as “grant of option”, “exercise of option” etc., but does not give the participants any right to acquire shares. Instead, the phantom scheme promises participants a cash sum calculated so as to equate to the increase in the value of notional tracker-shares between a starting date (to mirror the date when a real option would have been granted) and a date or period of time when they can claim the cash bonus (to mirror when a real option would have been exercised). The promise, like a real share award or option, is usually subject to performance conditions that have to be met. The employee obtains a cash employment reward by reference to the increase in the value of the business in the same way as if a real option had been exercised and real shares acquired.

There are many commercial reasons why an employer may use such a phantom scheme: for example the company’s owners may be happy to share the economic value of equity, but not equity itself. Or the employer is a division of another company, but can create a measurement of its equity value and wants employees to have a share in that even though there is no actual stock.

Subject to the detailed documentation, a phantom option is not an option, nor does it fall within any other category of security in ITEPA03/S420 (1). There is therefore no charge on grant of the phantom option under the provisions of Part 7 ITEPA03, nor is there a money’s worth charge under ITEPA03/S62 at this time. There is no right to acquire securities so it is not a securities option either, and therefore Chapter 5 does not apply. The cash will be taxed under ITEPA03/S62 in the same way as any other cash bonus.

Phantom options: employer chooses to award shares in certain circumstances

Some phantom schemes provide that if the price of the tracker shares does not move sufficiently, then the employer can choose to give the employee the shares instead. As there is no right to receive securities under this arrangement, it would not be within Chapter 5 Part 7 of ITEPA (i.e. not a securities option). Receipt of the cash will therefore be taxed in the same way as any other cash bonus. Where the employer chooses to pay the bonus in securities this will be taxed as money’s worth in accordance with ITEPA03/S62.