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Income Tax (Earnings and Pensions) Act 2003

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.

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