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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—equation: plus[times[char[M],char[V]],minus[char[C]]]

            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

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     (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—equation: plus[times[char[A],char[G]],minus[times[char[D],char[A]]]]

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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—equation: plus[times[char[M],char[V]],minus[times[char[D],char[C]]]]

            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—equation: plus[char[C],minus[times[char[D],char[C]]]]

 

 

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

    239

 

            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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