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Phantom share schemes

What is a Phantom Share Scheme?

A Phantom Share Scheme is cash bonus arrangement whereby the amount of cash bonus paid is measured by reference to the value (or increase in value of real shares). No actual shares or share options are awarded.

Phantom Share Schemes are very similar to cash-settled Share Appreciation Rights (SARs) and the terms are often used interchangeably. 

Advantages of phantom share schemes?

  • Useful for companies whose shareholders do not wish to award real shares or are nervous about having minority shareholders.
  • A phantom right can be valued using a formula which produces a different result from the actual market value of a share – advantageous in circumstances where a company might have investments separate from the trading business which could be excluded.
  • Very flexible schemes which can be tailored to meet specific requirements.
  • Easy to set up and administer; no need to file a share scheme annual return with HMRC.

Tax status of Phantom Share Schemes

The tax treatment of a Phantom option is the same as a normal cash bonus. No tax is payable on the grant of a phantom option but any payouts made under a Phantom will be subject to income tax through PAYE and national insurance contributions (NICs). This can be contrasted with tax-advantaged share schemes e.g. Enterprise Management Incentives (EMIs), whereby provided certain conditions are met, an employee can usually exercise an option without liability to Income Tax or NICs.

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