Income Tax (Earnings and Pensions) Act 2003

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.

(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.

(4) Subsection (2) is subject to—

• section 519 (approved SAYE option schemes: no charge in respect of exercise of option),

• section 524 (approved CSOP schemes: no charge in respect of exercise of option), and

• section 530 (enterprise management incentives: 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 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

(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 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 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 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—

AG - DA

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”—

(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,

(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 (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

(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

(1) The amount of the gain realised by exercising the share option is—

MV - DC

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

• 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;

(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 schemes: 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 option as was deducted in calculating the amount of the gain on that occasion is not a deductible cost.

(4) The amount of the gain is calculated in accordance with section 531 (enterprise management incentives: limitation of charge on exercise of option to acquire shares below market value) or 532 (enterprise management incentives: 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

(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—

C - DC

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”—

(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 section 526 (approved CSOP schemes: 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 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 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

(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—

(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 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 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 contribution).

(5) In this section—

• “approval”, in relation to an election, means approval by the Board of Inland Revenue under paragraph 3B of Schedule 1 to the Contributions and Benefits Act; and

• “secondary contributor” has the same meaning as in that Act (see section 7).

482 Deductible amount in respect of special contribution met by employee

(1) The amount of the liability referred to in subsection (4) is a deductible amount for the purposes of section 478(1), if conditions A to D are met.

(2) Condition A is that a notice in respect of the share option was given to the Board of Inland Revenue in accordance with section 1 of the Social Security Contributions (Share Options) Act 2001 (c. 20) before 11th August 2001.

(3) Condition B is that the person or one of the persons who gave that notice is a person who (apart from that Act) was liable, or would have become liable, by virtue of an election under paragraph 3B(1) of Schedule 1 to the Contributions and Benefits Act, to pay secondary Class 1 contributions in respect of a gain arising on the exercise, assignment or release of the share option.

(4) Condition C is that that person became liable to pay a special contribution under section 2 of the Social Security Contributions (Share Options) Act 2001 in respect of the share option.

(5) Condition D is that that person met that liability before 11th August 2001 or before the end of such further period as the Board of Inland Revenue directed under section 2(5) of that Act.