Income Tax (Earnings and Pensions) Act 2003 Schedule 2 paragraph 32

Permitted restrictions: provision for forfeiture

Paragraph 32 of Schedule 2 sets out the rules under which a Share Incentive Plan (SIP) may include provisions requiring employees to forfeit their shares in certain circumstances, while still qualifying for tax-advantaged status.

• A SIP may require a participant to forfeit free, partnership, or matching shares if the participant leaves employment within a specified holding period, but only if that period does not exceed three years from the date the shares were awarded.
• Forfeiture on leaving employment may only apply where the employee leaves other than as a "good leaver" — that is, someone who leaves due to injury, disability, redundancy, retirement, or a relevant transfer of undertaking (TUPE transfer), or where the employing company ceases to be associated with the company that established the plan.
• A SIP may also require forfeiture of free, partnership, or matching shares if the participant has met certain performance targets as a condition of receiving the shares and those performance targets are subsequently found not to have been met.
• These forfeiture provisions are the only circumstances in which a SIP can compel employees to give up their shares — any other forfeiture condition would cause the plan to fail to meet the requirements for tax-advantaged status.