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Income Tax (Earnings and Pensions) Act 2003

The tax advantages

2017.Sections 489 to 499 relate to the first major topic dealt with in this Chapter: the tax advantages possessed by an approved SIP.

Section 489: Operation of tax advantages in connection with approved SIP

2018.This section is introductory, being concerned with the general scope of the tax advantages applying to an approved SIP. Those advantages do not apply to an individual who is not chargeable to tax under Part 2 in respect of the eligible employment (as defined) (see subsection (2)).

2019.This section is the first of two that derive from paragraph 77 of Schedule 8 to FA 2000 (the other being section 500).

2020.Subsections (2) and (3) are derived from paragraph 77(2) of Schedule 8 to FA 2000. The material in that sub-paragraph has been divided to make it easier to understand; and the definition of “the eligible employment” is new.

Section 490: No charge on award or acquisition of shares: general

2021.This section is the first of four that deal with the tax advantages connected with the award of shares. It contains the basic proposition that the employee is not liable to income tax on the value of the beneficial interest in the plan shares that passes to the employee at the time those shares are acquired.

2022.This section derives from paragraph 78(1) of Schedule 8 to FA 2000, a sub-paragraph that has now been divided into two subsections.

Section 491: No charge on award of shares as taxable benefit

2023.This section is the second of four that deal with the tax advantages connected with the award of shares. It provides that an employee is not liable to income tax under Chapter 8 of Part 3. That Chapter forms part of the benefits code, and provides for income tax liabilities to arise on acquisitions of shares.

2024.This section derives from paragraph 78(2) of Schedule 8 to FA 2000. That sub-paragraph contains a second sentence stating that any charge to tax under section 162(6) of ICTA remained unaffected. As the provision is expressed in this section in a form that does not impinge in any way on the provisions rewriting section 162(6) of ICTA (in Chapter 9 of Part 3), this second sentence has been omitted on the basis that it is unnecessary.

Section 492: No charge on partnership share money deducted from salary

2025.This section is the third of four that deal with the tax advantages connected with the award of shares. It provides that an employee is not liable to income tax under Part 2 where partnership share money is deducted from the employee’s salary under a partnership share agreement. The expressions “partnership share agreement” and “partnership share money” are defined in Schedule 2 (in paragraphs 44 and 45 respectively); and these expressions may also be found in the index of defined expressions in paragraph 100 at the end of that Schedule.

2026.This section derives from paragraph 83 of Schedule 8 to FA 2000.

Section 493: No charge on acquisition of dividend shares

2027.This section is the last of four that deal with the tax advantages connected with the award of shares. It provides that a scheme participant is not liable to income tax on the amount applied by the trustees in acquiring dividend shares on the participant’s behalf.

2028.This section derives from paragraph 89 of Schedule 8 to FA 2000. Subsection (1) reorganises the material in paragraph 89(1); in subsection (2) the word “amount” replaces the words “amounts of dividends”; and subsections (3) to (5) vary the order of material drawn from paragraph 89(3) and (4) of Schedule 8 to FA 2000.

Section 494: No charge on removal of restrictions applying to shares

2029.This section is the first of three that deal with the tax advantages connected with the holding of shares. Subsections (1) and (2) apply where a participant’s plan shares are subject to provision for forfeiture, and that provision is varied or removed. In these circumstances a participant is not liable to income tax by virtue of sections 427 or 449. Those sections may be found, respectively, in Chapters 2 and 4 of this Part. Subsection (3) provides that a participant is not liable to income tax by virtue of section 449 when the holding period comes to an end. The expressions “provision for forfeiture” and “holding period” are defined in Schedule 2, in paragraphs 99(1) and 36 respectively.

2030.This section derives from paragraph 80(1) and (2) of Schedule 8 to FA 2000. There is a new subsection (1), setting out the circumstances in which subsection (2) applies.

Section 495: No charge on increase in value of shares of dependent subsidiary

2031.This section is the second of three that deal with tax advantages connected with the holding of shares. It provides that a participant is not liable to income tax by virtue of section 453 (charge on increase in value of shares of dependent subsidiary) in respect of any of the participant’s shares that are subject to the plan when the chargeable increase is determined for the purposes of that section.

2032.This section derives from paragraph 80(3) of Schedule 8 to FA 2000. In order to make that provision easier to understand, the rewritten legislation now consists of two subsections.

2033.Subsection (1) makes a minor change to the law. If plan shares are sold while they are still in the plan it is not the practice of the Inland Revenue to attempt to charge income tax under the dependent subsidiary charge in section 79 of FA 1988. However, there is a problem with the wording in paragraph 80 in that if the “appropriate time” for the purposes of that section is the time of sale it is debatable whether at that point the shares are still subject to the plan. In order to make it clear that no charge to income tax arises under section 453 in such circumstances, the words “or immediately before” have been added before the words “the appropriate time” at the end of this subsection. See Change 126 in Annex 1.

Section 496: No charge on cash dividend retained for reinvestment

2034.This section is the last of three that deal with the tax advantages connected with the holding of shares. It provides that a participant is not liable to income tax in respect of the amount of a cash dividend that is not reinvested but is carried forward and held by the trust with a view to reinvestment at a later date. It derives from paragraph 91 of Schedule 8 to FA 2000.

Section 497: Limitations on charges on shares ceasing to be subject to plan

2035.This section is the first of two that deal with the tax advantages connected with shares ceasing to be subject to approved SIPs. It provides that liability to income tax only arises in specified limited circumstances when shares cease to be subject to the plan.

2036.This section brings together three general propositions contained in paragraphs 81(7), 86(6) and 93(6) of Schedule 8 to FA 2000 respectively. The opportunity has been taken to bring these three sub-paragraphs into better alignment. All three subsections now refer to “income tax” (as opposed to “tax”); and in subsection (2) the reference to “the employee” has been omitted. Paragraph 77(1) of Schedule 8 to FA 2000 may be relied on for the change to the use of the term “income tax”.

Section 498: No charge on shares ceasing to be subject to plan in certain circumstances

2037.This section is the second of two that deal with the tax advantages connected with shares ceasing to be subject to approved SIPs. It provides that a participant is not liable to income tax on shares ceasing to be subject to the plan if the shares so cease because the participant ceases to be in relevant employment in the circumstances specified in subsection (2). The meaning of a participant ceasing to be in relevant employment is explained in paragraph 95 of Schedule 2 to this Act.

2038.This section derives from sub-paragraphs (1) and (2) of paragraph 87 of Schedule 8 to FA 2000. Subsection (2)(d) reorganises the material to be found in paragraph 87(3)(d) of Schedule 8.

2039.That paragraph concludes by providing two definitions. The first definition (that of “redundancy”) has now been placed in paragraph 99(1) of Schedule 2 to this Act; and the second (which appears in the rewritten legislation as a definition of “the specified retirement age”) has now been placed in paragraph 98 of Schedule 2.

2040.The material set out in subsection (2) of this section is also set out in full in paragraph 32(2) of Schedule 2. This duplication should assist the reader.

Section 499: No charge in respect of incidental expenditure

2041.This section is concerned with incidental expenditure incurred in operating the plan; and provides that an employee is not liable to income tax in respect of such expenditure of the trustees, the company that established the SIP or the employee’s employer.

2042.The section derives from paragraph 78(3) of Schedule 8 to FA 2000, which was added by paragraph 4 of Schedule 13 to FA 2001.

2043.This section makes a minor change to the law in that it is now provided that there is also no liability to income tax for incidental expenditure incurred by the company which established the plan. See Change 127 in Annex 1.

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