Income Tax (Earnings and Pensions) Bill

House of Commons

Session 2002 - 03
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Income Tax (Earnings and Pensions) Bill

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 4 — Post-acquisition benefits from shares
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Interpretation
467   Meaning of “dependent subsidiary”
     (1)    For the purposes of this Chapter a company which is a 51% subsidiary is a
“dependent subsidiary” throughout a period of account of the company unless
all of the following conditions are met—
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           (a)           the conditions relating to the company in subsections (2) and (3),
           (b)           the condition relating to a directors’ certificate in subsection (4), and
           (c)           the condition relating to an auditors’ report in subsection (5).
     (2)    The first condition relating to the company is that the whole or substantially
the whole of the company’s business during the period of account (taken as a
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whole) is carried on with persons who are not members of the same group as
the company.
     (3)    The second condition relating to the company is that during that period
either—
           (a)           there is no increase in the value of the company as a result of intra-
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group transactions, or
           (b)           any such increase in value does not exceed 5% of the value of the
company at the beginning of the period (or a proportionately greater or
smaller percentage in the case of a period which is longer or shorter
than a year).
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     (4)    The condition relating to a directors’ certificate is that the directors of the
principal company of the group give to the Inland Revenue, not later than 2
years after the end of the period of account, a certificate that in their opinion
the conditions in subsections (2) and (3) are satisfied in relation to that period.
     (5)    The condition relating to an auditor’s report is that there is attached to that
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certificate a report addressed to those directors by the auditors of the
subsidiary and stating that the auditors—
           (a)           have enquired into the state of affairs of the company with particular
reference to the conditions in subsections (2) and (3), and
           (b)           are not aware of anything to indicate that the opinion expressed by the
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directors in their certificate is unreasonable in all the circumstances.
     (6)    For the purposes of subsection (2) business carried on with a 51% subsidiary of
the company is to be treated as carried on with a person who is not a member
of the same group as the company.
     (7)    But subsection (6) does not apply if the whole or substantially the whole of the
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business of that or any other 51% subsidiary of the company during the period
of account (taken as a whole) is carried on with members of the group other
than the company and its 51% subsidiaries.
     (8)    In this section—
                    “group” means a principal company and all its 51% subsidiaries,
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                    “intra-group transactions” means transactions between companies which
are members of the same group on terms which are not such as might
be expected to be agreed between persons acting at arm’s length (other
than any payment for group relief within the meaning given in section
402(6) of ICTA),
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                    “period of account”, in relation to a company, means the period for which
it makes up its accounts, and

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 4 — Post-acquisition benefits from shares
    234

                    “principal company” means a company of which another company is a
51% subsidiary and which is not itself a 51% subsidiary of another
company.
468   Meaning of “employee-controlled”
For the purposes of this Chapter a company is “employee-controlled” by virtue
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of shares of a class if—
           (a)           the majority of the company’s shares of that class (other than any held
by or for the benefit of an associated company) are held by or for the
benefit of employees or directors of the company or a company
controlled by the company, and
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           (b)           those directors and employees are together able as holders of the shares
to control the company.
469   Shares “held by outside shareholders”
For the purposes of this Chapter a company’s shares are “held by outside
shareholders” if the shares are held otherwise than by or for the benefit of—
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           (a)           directors or employees of the company,
           (b)           an associated company of the company, or
           (c)           directors or employees of any such associated company.
470   Minor definitions
     (1)    In this Chapter—
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                    “associated company” has the same meaning as, by virtue of section 416
of ICTA, it has for the purposes of Part 11 of ICTA;
                    “director”, except in sections 452(3), 456, 460 and 468 (cases excluded from
charges and definition of “employee-controlled”), includes a person
who is to be or has been a director;
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                    “employee”, except in those provisions, includes a person who is to be or
has been an employee;
                    “interest in shares” includes an interest in the proceeds of sale of part of
the shares, but not a right to acquire shares;
                     “shares” includes stock and any securities as defined in section 254(1) of
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ICTA;
                    “value”, in relation to shares, means the amount which the person holding
the shares might reasonably expect to obtain from a sale in the open
market.
     (2)    In this Chapter—
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                    “the acquisition,”
                    “the employee”,
                    “the employer company”, and
                    “the shares”,
            have the meaning indicated in section 447(1) to (3).
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Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 5 — Share options
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Chapter 5
Share options
Introduction
471   Share options to which this Chapter applies
     (1)    This Chapter applies to a share option granted by reason of a person’s office or
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employment as a director or employee of a company.
     (2)    The person may be a director or employee of the company whose shares are the
subject of the share option, or of another company.
     (3)    The share option may be granted to the director or employee or to another
person.
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     (4)    In this Chapter, a “share option” means a right to acquire shares in a company
and (unless the context indicates a different meaning)—
                    “the employee”, in relation to a share option, means the person mentioned
in subsection (1); and
                    “the share option” means the right to acquire shares mentioned there,
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            and “director” and “employee” have the extended meaning given by section
487(1).
472   Introduction to taxation of share options
     (1)    The starting-point is that liability to tax may arise by virtue of Chapter 1 of Part
3 (earnings) or Chapter 10 of that Part (taxable benefits: residual liability to
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charge) when the share option is received, but not when it is exercised.
     (2)    But section 474 (no charge in respect of receipt of shorter-term option) contains
an exemption from this liability.
     (3)    Liability to tax may arise when the share option is exercised by virtue of—
           (a)           Chapter 8 of Part 3 (taxable benefits: notional loans in respect of
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acquisitions of shares), or
           (b)           section 476 or 477 (charge on exercise etc. of option).
     (4)    Liability to tax may also arise when the share option is assigned or released by
virtue of section 476 or 477.
     (5)    There are special rules relating to share options received under—
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           (a)           approved SAYE option schemes, (see Chapter 7 of this Part),
           (b)           approved CSOP schemes, (see Chapter 8 of this Part), or
           (c)           enterprise management incentives (see Chapter 9 of this Part).
473   Share options to which this Chapter does not apply
     (1)    This Chapter (apart from sections 472 and 485) does not apply to a share option
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granted by reason of a person’s office or employment if the earnings from the
office or employment were not (or would not have been if there had been any)
general earnings to which section 15 or 21 applies (earnings for year when
employee resident and ordinarily resident in the UK).

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 5 — Share options
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     (2)    This Chapter (apart from sections 472 and 485) does not apply to a share option
so granted after the person has ceased to hold the office or employment, if it
would not apply in the event of the option being granted in the last tax year in
which the office or employment was held.
Receipt of share option
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474   No charge in respect of receipt of shorter-term option
     (1)    Subsection (2) applies if the share option cannot be exercised after the tenth
anniversary of the date on which it was obtained.
     (2)    No liability to income tax arises in respect of the receipt of the share option,
except as provided by section 526 (approved CSOP: charge where option
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granted at a discount).
475   Value of longer-term option for purposes of liability to tax in respect of
receipt
     (1)    This section applies if the share option can be exercised after the tenth
anniversary of the date on which it was obtained.
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     (2)    For the purposes of any liability to tax by virtue of Chapter 1 of Part 3
(earnings) in respect of the receipt of the share option, the value of the option
is taken to be—
            where—
                    MV is the higher of—
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                  (a)                 the market value at the time the share option is obtained of the shares
that are the subject of the share option, and
                  (b)                 the market value at that time of any shares for which those shares may
be exchanged, and
                    C is—
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                  (a)                                     the amount or value of the consideration for which the shares
that are the subject of the share option may be acquired, or
                  (b)                                     if that consideration is variable, the least amount or value of the
consideration for which they may be acquired.
     (3)    In this section “market value” has the same meaning as it has for the purposes
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of TCGA 1992 by virtue of Part 8 of that Act.
Tax charge on exercise, assignment or release of share option
476   Charge on exercise, assignment or release of option by employee
     (1)    This section applies if the employee realises a gain by exercising, assigning or
releasing the share option.
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     (2)    The taxable amount determined under section 478 counts as employment
income of the employee for the relevant tax year.
     (3)    The “relevant tax year” is the tax year in which the option is exercised, assigned
or released.

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 5 — Share options
    237

     (4)    Subsection (2) is subject to—
                    section 519 (approved SAYE option scheme: no charge in respect of
exercise of option),
                    section 524 (approved CSOP scheme: no charge in respect of exercise of
option), and
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                    section 530 (EMIs: no charge on exercise of option to acquire shares at
market value).
477   Charge on employee where option exercised, assigned or released by another
person
     (1)    This section applies if a person other than the employee realises a gain by
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exercising, assigning or releasing the share option and any of the following is
the case—
           (a)           the option was granted to that other person, or
           (b)           the other person acquired the share option otherwise than by or under
an assignment made by way of a bargain at arm’s length, or
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           (c)           the employee and the other person are connected persons at the time
when the gain is realised.
     (2)    The taxable amount determined under section 478 counts as employment
income of the employee for the relevant tax year.
     (3)    The “relevant tax year” is the tax year in which the option is exercised, assigned
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or released.
     (4)    This section does not apply if the share option is exercised, assigned or released
after the death of the person to whom it was granted by—
           (a)           that person’s personal representatives, or
           (b)           the person on whom the option devolved under a testamentary
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disposition or on an intestacy or partial intestacy, whether beneficially
or as trustee.
     (5)    This section does not apply by virtue of subsection (1)(b) or (c) if the employee
was divested of the share option by operation of law.
     (6)    In that case the person who realises the gain is chargeable to tax under Case VI
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of Schedule D on an amount equal to the amount of the gain in a case within
subsection (1)(b) or (c) (see section 479 or 480).
478   Amount of charges
     (1)    The taxable amount for the purposes of sections 476 and 477 (charges on
exercise, assignment or release of option) is—
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            where—
                      AG is the amount of the gain (see section 479 or 480), and
                      DA is the total of any deductible amounts.
     (2)    For the purposes of subsection (1) each of the following is a “deductible
amount”—
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           (a)           subject to subsection (3), any amount that constitutes earnings from the
employee’s employment under Chapter 1 of Part 3 (earnings) in respect
of the receipt of the share option,

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 5 — Share options
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           (b)           subject to subsection (3), any amount that is treated as earnings from
the employee’s employment under Chapter 10 of Part 3 (taxable
benefits: residual liability to charge) in respect of the receipt of the share
option, and
           (c)           any amount that is a deductible amount by virtue of section 481 or 482
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(deductible amounts in respect of secondary Class 1 contributions or
special contribution met by the employee).
     (3)    If—
           (a)           the taxable amount is being determined for the purposes of section 477,
and
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           (b)           section 476 or that section has already applied to the share option by
virtue of an earlier event,
            so much of the amounts in subsection (2)(a) or (b) as was deducted in
calculating the taxable amount on that occasion is not a deductible amount.
479   Amount of gain realised by exercising option
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     (1)    The amount of the gain realised by exercising the share option is—
            where—
                    MV is the amount that a person might reasonably expect to obtain from a
sale of the shares acquired in the open market at the time the option is
exercised, and
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                    DC is the total of any deductible costs.
     (2)    For the purposes of subsection (1) each of the following is a “deductible cost”—
           (a)           subject to subsection (3), the amount or value of any consideration
given for the grant of the share option;
           (b)           the amount or value of any consideration given for the shares acquired;
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           (c)           in a case within section 477(1)(b) or (c), the amount of any gain realised
by a previous holder on an assignment of the option; and
           (d)           if an amount counts as employment income of the employee under
section 526 (approved CSOP scheme: charge where option granted at a
discount) in respect of the share option, so much of that amount as is
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attributable to the shares in question.
     (3)    If section 476 or 477 has already applied to the share option by virtue of an
earlier event, so much of the consideration given for the grant of the share
option as was deducted in calculating the amount of the gain on that occasion
is not a deductible cost.
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     (4)    The amount of the gain is calculated in accordance with section 531 (EMIs:
limitation of charge on exercise of option to acquire shares below market value)
or 532 (EMIs: modified tax consequences following disqualifying events) if—
           (a)           it is being calculated for the purposes of section 476 (charge on exercise
etc. of option by employee), and
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           (b)           section 531 or 532, as the case may be, applies.
480   Amount of gain realised by assigning or releasing option
     (1)    The amount of the gain realised by assigning or releasing the share option is—

Income Tax (Earnings and Pensions) Bill
Part 7 — Employment income: share-related income and exemptions
Chapter 5 — Share options
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            where—
                    C is the amount or value of the consideration for the assignment or
release, and
                    DC is the total of any deductible costs.
     (2)    For the purposes of subsection (1) each of the following is a “deductible cost”—
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           (a)           subject to subsection (3), the amount or value of any consideration
given for the grant of the share option;
           (b)           in a case within section 477(1)(b) or (c), the amount of any gain realised
by a previous holder on an assignment of the share option; and
           (c)           if an amount counts as employment income of the employee under
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section 526 (approved CSOP scheme: charge where option granted at a
discount) in respect of the share option, so much of that amount as is
attributable to the shares in question.
     (3)    If section 476 or 477 has already applied to the share option by virtue of an
earlier event, so much of the consideration given for the grant of the share
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option as was deducted in calculating the amount of the gain on that occasion
is not a deductible cost.
481   Deductible amount in respect of secondary Class 1 contributions met by
employee
     (1)    The amount calculated under subsection (2) is a deductible amount for the
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purposes of section 478(1) if—
           (a)           an agreement having effect under paragraph 3A of Schedule 1 to the
Contributions and Benefits Act has been entered into allowing the
secondary contributor to recover from the employee the whole or part
of any secondary Class 1 contributions in respect of the gain, or
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           (b)           an election having effect under paragraph 3B of Schedule 1 to that Act
is in force which has the effect of transferring to the employee the whole
or part of the liability to pay secondary Class 1 contributions in respect
of the gain.
     (2)    The amount is the sum of—
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           (a)           any amount that under the agreement referred to in subsection (1)(a) is
recovered in respect of the gain by the secondary contributor before 5th
June in the tax year following that in which the exercise, assignment or
release of the share option occurred, and
           (b)           the amount of any liability in respect of the gain that, by virtue of the
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election referred to in subsection (1)(b), has become the employee’s
liability.
     (3)    If notice of withdrawal of approval of the election is given, the amount of any
liability in respect of the gain for the purposes of subsection (2)(b) is limited to
the amount of the liability met before 5th June in the tax year following that in
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which the exercise, assignment or release of the share option occurred.
     (4)    Subsection (1) does not apply in respect of a liability to pay Class 1
contributions which is prevented from arising by virtue of section 2(1)(a) of the
Social Security Contributions (Share Options) Act 2001 (c. 20) (liability to pay
Class 1 contributions in respect of gain replaced by liability to pay special
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contribution).
     (5)    In this section—



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