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(a) in the case of a company whose affairs are managed by a board | |
of directors or similar body, means a member of that board or | |
similar body, | |
(b) in the case of a company whose affairs are managed by a single | |
director or similar person, means that director or person, | 5 |
(c) in the case of a company whose affairs are managed by its | |
members, means a member, | |
and includes any person who is to be or has been a director; | |
“employee” includes— | |
(a) in relation to a company, a person taking part in the | 10 |
management of the affairs of the company who is not a director, | |
and | |
(b) a person who is to be or has been an employee; | |
“market value”, in relation to an interest in shares, means the amount that | |
might reasonably be expected to be obtained from a sale of the interest | 15 |
in the open market; | |
“shares” (except in section 423 in the expression “convertible shares”) | |
includes— | |
(a) stock, | |
(b) securities issued by a company, and | 20 |
(c) any other interest of a member of a company; | |
“terms” on which a person is entitled to an interest in shares means terms | |
imposed by contract or arrangement or in any other way. | |
(2) In this Chapter— | |
“the employee”, | 25 |
“the employee’s interest”, | |
“the employer company”, and | |
“the shares”, | |
have the meaning indicated in section 422(1) and (2). | |
Chapter 3 | 30 |
Convertible shares | |
Introduction | |
435 Application of this Chapter | |
(1) This Chapter applies where a person (“the employee”)— | |
(a) has acquired convertible shares or an interest in such shares in a | 35 |
company, and | |
(b) did so as a director or employee of that or another company. | |
(2) For the purposes of this Chapter shares are “convertible” if— | |
(a) they confer on the holder an immediate or conditional entitlement to | |
convert them into shares of a different class, or | 40 |
(b) they are held on terms that authorise or require the grant of such an | |
entitlement to the holder if certain circumstances arise, or do not arise. | |
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(3) The references, in relation to the terms of a person’s entitlement, to | |
circumstances arising include references to— | |
(a) the expiry of a period specified in or determined under those terms, | |
(b) the death of that or any other person, and | |
(c) the exercise by any person of a power conferred on that person by or | 5 |
under those terms. | |
(4) In this Chapter— | |
“the employer company” means the company as a director or employee of | |
which the employee acquired the convertible shares or the interest in | |
them, and | 10 |
“the shares” means the shares mentioned in subsection (1)(a); | |
and “director” and “employee” have the extended meaning given by section | |
446(1). | |
436 Shares acquired “as a director or employee” | |
(1) For the purposes of this Chapter a person (“E”) acquires shares or an interest in | 15 |
shares “as a director or employee” of a company if E acquires the shares or | |
interest in pursuance of— | |
(a) a right conferred on, or opportunity offered to, E by reason of E’s office | |
or employment as a director or employee of the company; | |
(b) a right or opportunity assigned to E, having been conferred on or | 20 |
offered to some other person by reason of E’s office or employment as | |
a director or employee of the company; or | |
(c) an assignment, the shares or interest having been acquired by some | |
other person by reason of E’s office or employment as a director or | |
employee of the company. | 25 |
(2) The references in subsection (1) to a right or opportunity conferred or offered | |
by reason of E’s office or employment include— | |
(a) one so conferred or offered after E has ceased to hold the office or | |
employment, and | |
(b) one that arises from the fact that shares— | 30 |
(i) which E acquired as a director or employee (or is treated as so | |
acquiring by virtue of this paragraph), or | |
(ii) in which E so acquired an interest, | |
were convertible shares. | |
(3) A person who— | 35 |
(a) has acquired an interest in shares which is only conditional, convertible | |
shares or an interest in convertible shares, | |
(b) acquired that interest or those shares as a director or employee of a | |
company, or is treated by virtue of this subsection as having done so, | |
and | 40 |
(c) as a result of any two or more transactions— | |
(i) ceases to be entitled to that interest or those shares, and | |
(ii) becomes entitled to another interest in shares which is only | |
conditional or to any convertible shares or to an interest in | |
convertible shares, | 45 |
is to be treated for the purposes of this Chapter as if the interest or shares | |
mentioned in paragraph (c)(ii) were also acquired as a director or employee of | |
the company. | |
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(4) Subsection (3) also applies where the interest or shares mentioned in | |
subsection (3)(c)(ii) were acquired by a person connected with the first- | |
mentioned person. | |
(5) Nothing in subsection (3) or (4) affects the rights or opportunities included by | |
virtue of subsection (2)(b). | 5 |
(6) In this section “an interest in shares which is only conditional” has the same | |
meaning as in Chapter 2 of this Part (conditional interests in shares) (see | |
section 424 and the definition of shares in section 434(1)). | |
437 Cases where this Chapter does not apply | |
(1) This Chapter does not apply where a person has acquired convertible shares or | 10 |
an interest in such shares as a director or employee of a company if the earnings | |
from the office or employment in question 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). | |
(2) This Chapter does not apply by virtue of section 436(2)(a) (right or opportunity | 15 |
conferred or offered after person has ceased to hold office or employment) if it | |
would not apply if the right or opportunity had been conferred or offered in | |
the last tax year in which the office or employment was held. | |
Tax charge | |
438 Charge on conversion of shares | 20 |
(1) This section applies if, at a time when the employee has a beneficial interest in | |
them, the shares are converted into shares of a different class in pursuance of | |
an entitlement to convert them which has been conferred on the holder. | |
(2) The taxable amount determined under section 439 counts as employment | |
income of the employee for the relevant tax year. | 25 |
(3) The “relevant tax year” is the tax year in which the conversion occurs. | |
(4) This section is subject to— | |
section 440 (case outside charge under this section: conversion of entire | |
class), and | |
section 441 (case outside charge under this section: acquisition of | 30 |
conditional interest). | |
439 Amount of charge | |
(1) The taxable amount for the purposes of section 438 (charge on conversion of | |
shares) is—![equation: plus[times[char[M],char[V]],minus[times[char[D],char[A]]]]](missing.gif) | |
where— | 35 |
MV is the market value of the shares into which the convertible shares are | |
converted at the time of the conversion, and | |
DA is the total of any deductible amounts. | |
(2) For the purposes of subsection (1) each of the following is a “deductible | |
amount”— | 40 |
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(a) the amount or value of any consideration given for the convertible | |
shares or for the interest in them; | |
(b) the amount or value of any consideration given for the conversion; | |
(c) any amount that constitutes earnings from the employee’s | |
employment under Chapter 1 of Part 3 (earnings) in respect of the | 5 |
acquisition of the convertible shares or the interest in them; | |
(d) any amount that is treated as earnings from the employee’s | |
employment under Chapter 8 of Part 3 (taxable benefits: notional loans | |
in respect of acquisitions of shares) in respect of the acquisition; | |
(e) if the convertible shares were, or the interest in them was, acquired by | 10 |
the exercise of a share option, any amount that counts as employment | |
income of the employee under section 476 (charge on employee on | |
exercise etc. of option) in respect of the exercise; and | |
(f) if the convertible shares were, or the interest in them was, acquired | |
through a series of conversions each of which was a taxable conversion, | 15 |
the taxable amount for each conversion, so far as not falling within | |
paragraph (c), (d) or (e). | |
(3) If, not later than the conversion, an event occurred in respect of the shares by | |
virtue of which an amount counts as employment income of the employee | |
under— | 20 |
(a) section 449 (charge on occurrence of chargeable event), or | |
(b) section 453 (charge on increase in value of shares of dependent | |
subsidiary), | |
that amount is a “deductible amount” for the purposes of subsection (1). | |
(4) Section 541(2) (effects of the EMI code on other income tax charges) also | 25 |
provides that an amount is to be regarded as a “deductible amount” for the | |
purposes of subsection (1). | |
(5) For the purposes of subsection (1) the “market value” of shares means the | |
amount that might reasonably be expected to be obtained from a sale of the | |
shares in the open market. | 30 |
(6) In subsection (2) “taxable conversion” means a conversion which— | |
(a) resulted in an amount counting as employment income under section | |
438, or | |
(b) would have done so but for the fact that the market value of the shares | |
at the time of the conversion did not exceed the sum of the deductible | 35 |
amounts. | |
(7) The reference in subsection (3) to an event includes the expiry of a period. | |
440 Case outside charge under section 438: conversion of entire class | |
(1) Section 438 (charge on conversion of shares) does not apply if— | |
(a) the conversion is a conversion of shares of one class only (“the original | 40 |
class”) into shares of one other class only (“the new class”), and | |
(b) all shares of the original class are converted into shares of the new class, | |
and | |
(c) condition A or B is met. | |
(2) Condition A is that immediately before the conversion the majority of the | 45 |
company’s shares of the original class are not held by or for the benefit of— | |
(a) directors or employees of the company, | |
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(b) an associated company of the company, or | |
(c) directors or employees of such an associated company. | |
(3) Condition B is that immediately before the conversion the company is | |
employee-controlled by virtue of holdings of shares of the original class. | |
(4) A company is “employee-controlled” by virtue of holdings of shares of a class | 5 |
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 | 10 |
(b) those directors and employees are together able as holders of the shares | |
to control the company. | |
(5) In this section “associated company” has the meaning given by section 416 of | |
ICTA. | |
441 Case outside charge under section 438: acquisition of conditional interest | 15 |
(1) Section 438 (charge on conversion of shares) does not apply if the interest | |
which the employee acquires in the shares into which the convertible shares | |
are converted is an interest which is only conditional. | |
(2) “Only conditional” has the same meaning as in Chapter 2 of this Part (see | |
section 424). | 20 |
Supplementary provisions | |
442 Amount or value of consideration given for shares or conversion | |
(1) This section applies for the purposes of section 439 (amount of charge) in | |
determining the amount or value of the consideration given for the convertible | |
shares, or for the interest in them, or for the conversion. | 25 |
(2) Subject to the following provisions of this section, the consideration given for | |
the convertible shares, or for the interest in them, is any consideration given in | |
respect of the acquisition by— | |
(a) the employee, or | |
(b) if section 436(1)(c) applies, the person by whom the shares were, or | 30 |
interest was, acquired. | |
(3) The amount or value of the consideration given by a person for shares, or an | |
interest in shares, includes the amount or value of any consideration given for | |
a right to acquire the shares or interest. | |
(4) If any consideration is given partly in respect of one thing and partly in respect | 35 |
of another, the amount given in respect of the different things is to be | |
determined on a just and reasonable apportionment. | |
(5) The consideration which for the purposes of this section is taken to be given | |
wholly or partly for anything does not include the performance of any duties | |
of, or in connection with, the office or employment by reference to which the | 40 |
shares or interest in question have been acquired by a person as a director or | |
employee of a company. | |
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(6) No amount is to be counted more than once in calculating the amount or value | |
of any consideration. | |
443 Amount or value of consideration given for right to acquire shares | |
(1) This section applies for the purposes of section 442(3) in determining the | |
amount or value of any consideration given for a right to acquire shares. | 5 |
(2) Subsection (3) applies if the right to acquire shares (“the new option”) is the | |
whole or part of the consideration for the assignment or release of another right | |
to acquire shares (“the old option”). | |
(3) The amount or value of the consideration given for the new option is to be | |
treated as being the sum of— | 10 |
(a) the amount by which the amount or value of the consideration given | |
for the grant of the old option exceeds the amount or value of any | |
consideration for the assignment or release of the old option, apart from | |
the new option, and | |
(b) any valuable consideration given for the grant of the new option, apart | 15 |
from the old option. | |
(4) Two or more transactions are to be treated for the purposes of subsection (2) as | |
a single transaction by which a right to acquire shares is assigned for a | |
consideration which consists of or includes another right to acquire shares if— | |
(a) the transactions result in— | 20 |
(i) a person ceasing to hold a right to acquire shares, and | |
(ii) that person or a connected person coming to hold another right | |
to acquire shares, and | |
(b) one or more of the transactions is effected under arrangements to which | |
two or more persons who hold rights to acquire shares, in respect of | 25 |
which there may be liability to tax under Chapter 5 of this Part (share | |
options), are parties. | |
(5) Subsection (4) applies regardless of the order in which the assignment and the | |
acquisition occur. | |
(6) In this section “release” includes agreeing to the restriction of the exercise of the | 30 |
right. | |
444 Conversion in consequence of employee’s death | |
(1) Subsection (2) applies if— | |
(a) the employee dies holding an interest in convertible shares, | |
(b) those shares are converted into shares of a different class either on, or | 35 |
within 12 months after, the death, and | |
(c) the conversion takes place wholly or partly as a consequence of the | |
death. | |
(2) This Chapter applies as if the conversion had taken place immediately before | |
the death and had been in pursuance of an entitlement to convert conferred on | 40 |
the deceased. | |
445 Duty to notify conversions of shares | |
(1) Subsection (2) applies if— | |
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(a) a person has provided an individual with convertible shares in a | |
company, or an interest in such shares, | |
(b) those shares are subsequently converted into shares of a different class, | |
and | |
(c) the circumstances are such that the conversion results or may result in | 5 |
an amount counting as employment income of that individual under | |
section 438 (charge on conversion of shares). | |
(2) Each of the following persons— | |
(a) the person who provided the shares or interest, and | |
(b) the employer company, | 10 |
must provide the Inland Revenue with particulars in writing of the shares and | |
their conversion. | |
(3) The particulars must be provided before 7th July in the tax year following that | |
in which the conversion takes place. | |
446 Minor definitions | 15 |
(1) In this Chapter— | |
“director”— | |
(a) in the case of a company whose affairs are managed by a board | |
of directors or similar body, means a member of that board or | |
similar body, | 20 |
(b) in the case of a company whose affairs are managed by a single | |
director or similar person, means that director or person, | |
(c) in the case of a company whose affairs are managed by its | |
members, means a member, | |
and includes any person who is to be or has been a director; | 25 |
“employee” includes— | |
(a) in relation to a company, a person taking part in the | |
management of the affairs of the company who is not a director, | |
and | |
(b) a person who is to be or has been an employee; | 30 |
“shares” (except in section 436 in the expression “an interest in shares | |
which is only conditional”) includes stock and any other interest of a | |
member of a company; | |
“terms” on which a person holds shares or an interest in shares means | |
terms imposed by contract or arrangement or in any other way. | 35 |
(2) In this Chapter— | |
“the employee”, | |
“the employer company”, and | |
“the shares”, | |
have the meaning indicated in section 435(1) and (4). | 40 |
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