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Income Tax (Earnings and Pensions) Act 2003

Chapter 8: Taxable benefits: notional loans in respect of acquisitions of shares
Overview

750.This Chapter deals with a benefit which may arise on certain acquisitions of shares by employees. It derives from those parts of section 162 of ICTA which deal with acquisition of shares at undervalue. The legislation is included in the benefits code because the benefit is treated as a notional loan and, as such, some of the provisions in Chapter 7 of Part 3 apply to it.

Section 192: Application of this Chapter

751.This section sets out the subject of the legislation. It derives from section 162(1) and (9) and section 168(3)(b) of ICTA and also contains new material.

752.Subsection (1) describes the circumstances relating to an acquisition of shares which will bring it within the provisions of this Chapter.

753.Subsection (2) makes it clear that the shares can be in a company other than the employer.

754.Subsection (3). It derives from section 168(3)(b) of ICTA. It is now explicit that a right or opportunity to acquire shares, or an interest in shares, which is made available by an employer, is to be regarded – with certain exceptions – as being made available by reason of the employee’s employment. This change in approach is described more fully in Note 21 in Annex 2.

755.Subsection (4) defines the term “the acquisition” and gives shares acquired the label “employment-related shares”.

Section 193: Notional loan where acquisition for less than market value

756.This section is derived from parts of section 162(1), (2) and (9) of ICTA and contains new drafting material.

757.Subsection (1) outlines the circumstances in which a benefit arises. It also provides that payments made before the acquisition will be allowable. This is a minor change to the law. See Change 36 in Annex 1.

758.Subsection (1)(a) applies the section to employment-related shares for which no payment is made.

759.Subsection (1)(b) covers the situation in which some payment is made. The subsection prevents shares which are not fully paid at the time of issue (but which later become fully paid) from being valued as part-paid shares.

760.Subsection (3) provides that the benefit is treated, under Chapter 7 of Part 3, as an employment-related loan on which no interest is payable.

761.Subsection (4) lists the provisions in Chapter 7 of Part 3 which apply to the notional loan. This is a minor change to the law. See Change 37 in Annex 1.

762.The provisions listed include section 175 of this Act, which specifies the tax year for which the cash equivalent is treated as earnings. See Note 7 in Annex 2.

763.Subsection (5) lists the provisions of the Act which may exempt a person from liability to tax under this section.

Section 194: The amount of the notional loan

764.This section shows how the initial amount of the loan is calculated, and how the amount is reduced or subsequently varied in certain circumstances. It is derived from section 162(2), (3), (9) and (11) and section 185(8) of ICTA and includes new drafting material. See Note 22 in Annex 2.

765.The amount of the notional loan is used in the calculation of the cash equivalent of the benefit in accordance with section 182 or section 183 of this Act.

766.Subsection (1) sets out how to arrive at the initial amount of the loan. The value taken is that of fully paid up shares. The value is reduced by any “deductible amounts”.

767.Subsection (2) sets out what are the deductible amounts. Paragraph (a) allows the payment made for the acquisition as a “deductible amount”. A payment may be made before the shares are acquired and it has always been the practice to allow any advance payment of this sort as well as any payment made at the actual time of the acquisition. The words “or before” have been added to make this clear. This is a minor change to the law. See Change 36 in Annex 1.

768.Paragraphs (b)(c)(i) and (c)(ii) of subsection (2) derive from the words “so much of the undervalue on acquisition as is not chargeable to tax as an emolument of the employee” in section 162(3) of ICTA. This change in approach is explained in Note 22 in Annex 2.

769.Paragraph (c)(iii) of subsection (2) provides that an amount that counts as employment income under sections 476 or 477 of this Act is a deductible amount. This is a minor change to the law. See Change 38 in Annex 1.

770.Subsection (3) provides for the amount of the notional loan to be reduced where payments are made for the shares after the time they are acquired. The reduced amount is used in the calculation of the benefit in sections 182 or 183 of this Act, which entail ascertaining the maximum amount of the loan outstanding on a particular day.

Section 195: Discharge of notional loan: amount treated as earnings

771.This section covers the circumstances in which a notional loan is treated as discharged and the consequences of that treatment. It is derived from section 162(3), (4) and (5) of ICTA and contains new drafting material.

772.Subsection (1) sets out circumstances in which the notional loan is treated as discharged. The words “is released, transferred or adjusted” in section 162(4)(b) of ICTA have been left out on the grounds that they are unnecessary. There is no other way that the obligation could cease to bind the employee. The words “by surrender or otherwise” in section 162(4)(c) of ICTA have not been used in paragraph (c) because they are unnecessary.

773.Subsection (2) provides that the amount of a notional loan discharged in the circumstances described in subsection (1)(b) and (c) is treated as earnings.

774.Subsection (3) ensures that the amount in subsection (2) can be chargeable in a tax year after the year in which the employment has ended or has become an excluded employment as defined in section 63(4) of this Act. This derives from section 160(3) of ICTA, which is applied to the termination of a notional loan by section 162(5) of ICTA. If the employment has ceased there is no taxable employment and the section would not apply. Deeming the employment not to have ceased allows the section to apply in the case of the discharge of a notional loan for the year in which the event as a result of which it is discharged occurs. It is also necessary for the employment to be one which is not an “excluded employment” otherwise the section would not apply. Where the employment has become an “excluded employment” this subsection deems it not to be “excluded”.

Section 196: Effects on other income tax charges

775.This section derives from section 162(11) of ICTA which operates to give priority to any section by virtue of which an acquisition of shares results in an amount being chargeable to tax as emoluments.

776.Paragraph (b) of this section refers to sections 476 and 477 of this Act, which are derived from section 135 of ICTA. This is a minor change to the law. See Change 38 in Annex 1.

Section 197: Minor definitions

777.This section defines terms which are used in the sections and clarifies what counts as payment for shares.

778.The section is derived from section 162(1), (9) and (10) of ICTA and contains new drafting material.

779.Subsection (2) makes the meaning of “acquisition” very wide to discourage schemes intended to avoid chargeability under this Chapter. The meaning of “market value” is as in Part 8 of TCGA 1992.The wording of the definition has been changed to bring it into line with definitions of market value used elsewhere in this Act. See Note 23 in Annex 2.

780.Subsection (3) ensures that payment for shares made in kind or by any other means is included and that legal liability to make it is not needed for it to count as a payment.

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