Overview
1889.This Chapter is concerned with the income tax charges which may arise in respect of shares (or an interest in shares) which have been awarded by reason of an individual’s office or employment.
1890.The initial award of the shares may have given rise to a Schedule E charge as an emolument or benefit or taxed as general earnings under this Act. This Chapter is not concerned with that initial charge. Instead it provides for a charge to tax in certain circumstances on the increase in value of those shares and in respect of any special benefits which are received by virtue of ownership of those shares. The increase in value charges do not apply where the shares have been issued under one of the share schemes approved by the Inland Revenue, but the special benefits charge may still apply.
1891.The provisions in this Chapter derive from sections 77 to 88 of FA 1988. They apply to shares acquired on or after 26 October 1987 and replace legislation in sections 138 and 139 of ICTA which had a similar, though rather more wide-ranging, effect. Sections 138 and 139 of ICTA, together with the interpretation provisions in section 140 of ICTA still apply to shares acquired before 26 October 1987 and that legislation remains on the statute book although it has not been rewritten. Paragraphs 55 to 57 in Part 7 of Schedule 7 to this Act contain the appropriate savings and also rewrite the transitional provisions in section 88 of FA 1988 that are still relevant.
1892.Section 84 of FA 1988 is a capital gains tax provision and is duplicated in section 120(1) of TCGA 1992. As it is not intended to include the provision in this Act, the section has not been rewritten. Amendments to section 120 of TCGA 1992 are made by paragraph 210 of Schedule 6 to this Act.
1893.The 1988 anti-avoidance legislation contains three distinct charges in sections 78, 79 and 80 of FA 1988. That ordering of the charges has been followed in this Act with the corresponding charges now in sections 449, 453 and 457. Other than that, however, much of the material has been moved to present it in a logical and more helpful order. One broad intention is that in respect of each charge the legislation sets out in the following order
The scope of the charge
The calculation of the charge
The exceptions from the charge
Section 447: Application of this Chapter
1894.This section sets out the scope of the Chapter. Subsection (1) derives from the rule at the end of section 77 of FA 1988 that the provisions are concerned with acquisitions of shares in a company by a director or employee of that or any other company. The fact that these provisions only apply to shares issued on or after 26 October 1987 is made clear in Part 7 of Schedule 7 to which there is also a signpost in section 418(1).
1895.Subsections (2) and (3) are new. They spell out what subsequent references to “the acquisition” and “the shares” are references to. The fact that this Chapter applies to prospective and former employees is made clear by the reference to the extended definition in section 470. The definition of “the employer company” is designed to avoid some rather tortuous references to it elsewhere in this Chapter.
1896.Subsection (4) derives from the rules in section 77(1) and in section 87(4) of FA 1988 which explain that the Chapter is concerned both with shares acquired by the employee directly and with shares first issued to another person and then assigned to the employee.
1897.Subsection (5) derives from section 83(1) of FA 1988. That provision ensures that where the shares are issued to a connected person because the opportunity was offered to that person rather than the employee himself, the acquisition is treated as having been made by the employee. The charges in the Chapter generally operate by reference to beneficial interests and it is not expressly provided in section 83(1) of FA 1988 that the deeming provision applies to beneficial ownership although that is the way the subsection has always been interpreted. This section clarifies the general understanding that the opening words “For the purposes of this Chapter” imply that the shares are deemed to have been acquired by the employee as a director or employee. This clarification is explained in detail in Note 46 in Annex 2.
Section 448: Cases where this Chapter does not apply
1898.Subsection (1) derives from section 77(2) of FA 1988. It limits the scope of the Chapter to cases where the earnings from the employment are within section 15 or 21 reproducing the restriction in the source legislation to Case I employments. See Note 47 in Annex 2.
1899.Subsection (2) derives from section 77(3) of FA 1988 and is an exemption for public offers.
1900.Subsections (3) and (4) derive from section 77(4) of FA 1988 and extend the public offer exemption to certain other offers which are made to employees separate from a public offer.
Section 449: Charge on occurrence of chargeable event
1901.This is the first of the charging provisions and derives from parts of section 78(1) and (3) of FA 1988. The meaning of chargeable event, the calculation of the charge and the exceptions appear in separate sections. Subsection (5) acts as a signpost to the provisions which remove the charge under various approved schemes.
Section 450: Chargeable events
1902.This section defines what is and is not a chargeable event and derives from section 78(2), (5), (6) and (7) of FA 1988. It will be noted that a new label “outside shareholders” is used as shorthand for the persons within section 78(6)(a) of FA 1988 and the term is defined in section 469.
1903.The words in section 78(6)(c) of FA 1988 “which is not a dependent subsidiary” have been omitted in new subsection (4)(c) on the grounds that they are unnecessary. It is already clear from section 78(1)(b) of FA 1988 that no charge arises if the company is a dependent subsidiary.
1904.Subsection (6) derives from section 78(7) of FA 1988. The term “are references to such” has been used instead of “include” to make better sense of the additional words “or in any other way”.
Section 451: Amount of charge
1905.This section, which derives from section 78(3) of FA 1988, specifies the amount of the charge under section 449. The FA 1988 subsection is rather complex and so this section separates out the various ideas to make the provision easier to grasp.
Section 452: Cases outside charge under section 449
1906.This section brings together the various exceptions in sections 77 and 78 of FA 1988.
1907.Subsection (2) ensures that if a charge is taken under section 427 in respect of an event then no charge is taken under this section. It derives from the opening words of section 77(1) of FA 1988 which give priority to the charge on conditional shares in section 140A of ICTA (rewritten in Chapter 2 of this Part).
1908.Subsection (3) derives from section 78(4) of FA 1988 which contains the let-out if the employee has not been a director or employee of the company or an associated company within the seven years ending with the chargeable event. The source legislation uses the term “the person who acquired the shares” rather than the “employee”. However, since shares acquired by connected persons are treated as acquired by the employee, the effect is the same.
1909.Subsection (4) derives from section 78(1)(b) of FA 1988. Shares in dependent subsidiaries are excluded from the charge under section 449 because they are instead subject to a charge under section 453. For the sake of clarity this section replaces the word “at” in the phrase “at the time of the chargeable event” with “immediately before”. See Note 48 in Annex 2.
Section 453: Charge on increase in value of shares of dependent subsidiary
1910.This is the second of the charging provisions and derives from section 79(1) and (4) of FA 1988. Again, matters concerning what is chargeable, the calculation of the amount and the exceptions have been taken to separate sections.
1911.Subsection (3) derives from section 79(4) of FA 1988 and specifies the year of charge.
1912.Subsections (4) and (5) are new. Subsection (5) acts as a signpost to the provisions which remove the charge under various approved schemes.
Section 454: Chargeable increases
1913.This section derives from section 79(2) and (3) of FA 1988 and determines the period over which any rise in the value of the shares is measured in order to be an increase subject to charge.
Section 455: Amount of charge
1914.This section brings together all those parts of section 79 of FA 1988 which concern the calculation of the charge and in particular it makes clear what deductions should be made from the rise in value of the shareholding.
1915.Subsection (1) introduces a formula and subsection (2) specifies the items that are allowable deductions. Subsection (3) derives from section 79(6) of FA 1988 and is concerned with certain cases where the employee receives less than market value for the shares. The aim is to ensure that the employee is only charged on the difference between base value and the actual proceeds. That provision produces the right result where the chargeable increase is calculated by reference to the value of the shares at acquisition, but not where it is calculated by reference to the value of the shares at the later time that the company becomes a dependent subsidiary. The section produces the right result in both situations. It is a minor change to the law. See Change 113 in Annex 1.
1916.Subsection (4) derives from the final two lines in section 79(4) of FA 1988.
Section 456: Cases outside charge under section 453
1917.Subsection (2) reflects the opening words of section 77(1) of FA 1988 “subject to section 140A of the Taxes Act 1988”. It ensures that if a charge is taken under section 427 (conditional interests in shares) then no charge is taken under section 453. This is because if a disposal potentially gives rise to a charge under section 453 (which is more general in its application) and under section 427 then the latter charge has priority.
1918.Subsection (3) derives from section 79(7) of FA 1988 and provides a let-out if the employee has not been a director or employee of the company or an associated company in the seven years before the time that the company becomes a dependent subsidiary. As with section 452, the phrasing has been changed to produce a true exception and the reference is to “the employee” rather than “the person who acquired the shares”.
Section 457: Charge on other chargeable benefits from shares
1919.This is the third of the charging provisions and derives from section 80 of FA 1988. The term “chargeable benefit” in subsection (1) has replaced “special benefit” in order to be consistent with “chargeable event” and “chargeable increase” in the other charging provisions in this Chapter.
1920.An amount in respect of benefits attaching to shares may be charged on the employee, not only when the shares are owned by the employee (section 80(1) of FA 1988), but also when owned by other persons (section 83(1) and (4) of FA 1988). Subsection (2) brings together and clarifies how these rules are considered to operate and remedies the deficiencies in the wording of the source legislation. See Change 114 in Annex 1.
Section 458: Chargeable benefits
1921.This section derives from the rather complex rules in section 80 of FA 1988 giving further conditions as to when a benefit is a chargeable benefit.
1922.Subsection (2) introduces the following three subsections. The approach adopted is to define what are chargeable benefits, replacing the approach in FA 1988 of saying that all benefits are chargeable benefits unless paragraphs (a) and (b) of section 80 apply. This makes the rules easier to understand.
1923.Subsection (3) derives from section 80(2)(a) of FA 1988.
1924.Subsection (4) derives from section 80(1A) of FA 1988.
1925.Subsection (5) introduces the conditions in subsection (6) which derive from section 80(3) of FA 1988. Subsection (6)(a) uses the new term “outside shareholders” which was first introduced in section 450.
1926.Subsection (7) contains two definitions which apply solely for the purposes of this section. The definition of “the company” is new and clarifies which company is being referred to in subsections (4) and (6). The other definition derives from section 87(1) of FA 1988.
Section 459: Amount of charge
1927.This section specifies the amount of the chargeable benefit. It derives from section 80(4) of FA 1988 and the definition of “value” in section 87(1) of FA 1988.
Section 460: Cases outside charge under section 457
1928.This section derives from section 80(5) of FA 1988 which contains the let-out where the employee has not been a director or employee of the company or an associated company in the seven years before the benefit is received. There are two points to note. Section 80(5)(a) of FA 1988 refers to the company in subsection (1) when that subsection contains no reference to a company. It clearly means the company whose shares are mentioned in subsection (1). See Change 115 in Annex 1. Also, in section 80(5) of FA 1988 the test is expressed to apply to the person receiving the benefit. But by virtue of the connected persons rules in section 83(4) of FA 1988 the test effectively applies to the employee himself. Accordingly, the test is applied directly to the employee in this section.
Section 461: Related acquisitions of additional shares
1929.This section derives from section 82 (1) and (2) of FA 1988 and concerns the treatment of additional shares received by the employee in respect of an original holding which had been acquired by virtue of the employment. The effect is to treat the new shares as within the Chapter and as having been acquired at the same time as the original shares.
1930.An award of additional shares may give rise to a chargeable benefit within section 457. This section makes it clear that the timing rule in section 82(2)(b) of FA 1988 does not affect the date on which the charge under section 457 is taken. See Change 116 in Annex 1.
Section 462: Company reorganisations etc.
1931.This section derives from section 82(3) of FA 1988 and concerns exchanges of shares under company reorganisations. The main effect is to adopt the capital gains tax rule under which new holdings are treated as acquired as the original shares were.
1932.Subsections (3) and (4) derive from section 82(3)(b) and (c) of FA 1988. Subsection (3)(b) reflects what is meant by the rather obscure phrase “as is mentioned in section 128(1) and (2)” in section 82(3)(b).
Section 463: Disposals of shares to connected persons etc. ignored
1933.This section derives from section 83(2) and (3) of FA 1988. It is reasonably plain what section 83(2) of FA 1988 is trying to do, namely to ignore disposals which are not at arm’s length or are to a connected party so that the employee is deemed to retain the beneficial interest. However it is not clear whether the wording of that subsection achieves that result where the shares were originally issued to a connected party and so have already been subject to the deeming provision in section 83(1) of FA 1988. This has been made clear in this section by specifying that the employee retains the interest. It is a minor change to the law. See Change 114 in Annex 1.
Section 464: Application to interests in shares
1934.This section derives from section 81 of FA 1988 (which applies for the purposes of charges under sections 79 and 80 of FA 1988). It sets out the supplementary rule that where a person’s interest in shares is increased or reduced it is treated as the acquisition or disposal of a separate interest proportionate to the increase or reduction.
Section 465: Duty to notify acquisitions of shares or interests in shares
1935.This section derives from section 85 of FA 1988 which is the information requirements provision.
1936.The section makes explicit what is implicit in section 85 that the time limit runs by reference to the year in which the additional shares are acquired. This is a minor change to the law. See Change 116 in Annex 1.
1937.Subsection (3) provides that the particulars must be given to the Inland Revenue instead of to the inspector. See Change 158 in Annex 1.
1938.Subsection (4) rewrites the 92-day time limit by requiring the information to be provided before 7 July. This is in line with the new practice in Chapters 2 to 5 of this Part.
1939.Subsection (5) is new and ensures that notification of an acquisition need be made only once. This is a minor change to the law. See Change 116 in Annex 1.
Section 466: Duty to notify chargeable events and chargeable benefits
1940.This section also derives from section 85 of FA 1988 and contains the information requirements where certain charges arise.
1941.Subsection (2) provides that the particulars must be given to the Inland Revenue instead of to the inspector. See Change 158 in Annex 1.
1942.The time limit of 60 days has been extended to 92 days. See Change 111 in Annex 1.
Section 467: Meaning of “dependent subsidiary”
1943.This section derives mainly from section 86 of FA 1988. For ease of use subsection (1) is now introductory and the various conditions have been placed into four separate subsections. In subsection (4) the directors’ certificate is now to be given to the Inland Revenue rather than the inspector. See Change 158 in Annex 1.
1944.The definition of “period of account” in subsection (8) derives from section 86(3) of FA 1988. That definition was repealed by FA 2002 and a new definition was inserted into section 832(1) of ICTA. In relation to a company the definitions are effectively the same.
Section 468: Meaning of “employee-controlled”
1945.This section derives from section 87(2) of FA 1988. The definitions of “connected persons” and “control” in ICTA are applied by sections 718 and 719 respectively.
Section 469: Shares “held by outside shareholders”
1946.This section explains the new shorthand term which is used in sections 450 and 458. The definition derives from sections 78(6)(a) and 80(3)(a) of FA 1988.
Section 470: Minor definitions
1947.This section picks up the remainder of the definitions in section 87(1) of FA 1988 which are not included elsewhere. The meaning of “interest in shares” has been expanded to make it clear that it excludes a right to acquire shares eg options. See Change 117 in Annex 1.