Chapter 3: Relief if employee or other person obtains option to acquire shares
Overview
2621.The Chapter gives relief for the acquisition of shares “pursuant to an option”. It is based on Part 3 of Schedule 23 to FA 2003. “Option” is defined in section 1005 to include “any right to acquire shares”. This definition is based on the definition of “securities option” in section 420(8) of ITEPA. Using a similar definition of “option” relates the relief given to the employing company to the income tax charge on the employee.
2622.The definition is wider than the normal meaning of option as the shares may be acquired without the need to exercise any right. The Chapter follows the source legislation in describing this as the acquisition of shares “pursuant to an option”. This is also to align the language in this Chapter with that used in ITEPA. See, for example, section 477(3)(a) of ITEPA.
2623.Like Chapter 2 this Chapter gives relief for the acquisition of all types of share including restricted shares and convertible shares. The Chapter has rules to deal with a change in circumstances between the grant of the option and the acquisition of the shares (for example, the death of the employee or original option holder or a take-over of the employing company).
Section 1014: Overview of Chapter
2624.This section gives an overview of the Chapter. It is new.
Section 1015: Basic requirements for relief under Chapter 3
2625.This section sets out the basic requirements for relief under this Chapter. It is based on paragraphs 1, 3 and 27 of Schedule 23 to FA 2003.
2626.The requirements are very similar to those which apply to relief under Chapter 2. See section 1007.
Section 1016: Conditions relating to shares acquired
2627.This section identifies the type of shares that have to be acquired. It is based on paragraphs 4 and 12 of Schedule 23 to FA 2003.
Section 1017: Condition relating to employee’s income tax position
2628.This section gives the conditions that must be met in relation to the employee’s income tax position. It is based on paragraphs 14 and 27 of Schedule 23 to FA 2003.
2629.Subsection (1) gives the basic rule that the acquisition must be a chargeable event for the purposes of section 476 of ITEPA. Section 476(2) of ITEPA provides that “chargeable event” has the meaning given by section 477 of ITEPA. The list of chargeable events is given in section 477(3) of ITEPA.
2630.The only event relevant to this Chapter is section 477(3)(a) which applies to “the acquisition of securities pursuant to the employment-related securities option by an associated person”. (The definition of “associated person” for the purposes of section 477 of ITEPA, in section 472(1) of ITEPA, includes the person who acquired the option.)
2631.The income tax condition is satisfied whether or not an amount counts as employment income as a result of the chargeable event. This covers the case in which the shares are acquired under an approved share option scheme under which there is no charge on the acquisition. For example, section 519 of ITEPA provides that no liability to income tax arises on the exercise of an option under an approved SAYE option scheme.
Section 1018: Calculation of relief if shares are neither restricted nor convertible
2632.This section gives the amount of the relief if the shares are neither restricted nor convertible. It is based on paragraph 15 of Schedule 23 to FA 2003.
Section 1019: Calculation of relief if shares are restricted or convertible
2633.This section gives the amount of the relief if the shares are restricted or convertible, where they are acquired pursuant to an option. It is based on paragraphs 21 and 22C of Schedule 23 to FA 2003.
2634.Subsections (2)(a) and (3)(a) give the basic rule. The relief is equal to the amount that counts as employment income under section 476 of ITEPA when the shares are acquired. The chargeable amount is given in section 478 of ITEPA. In broad terms it is the market value of the shares at the time they are acquired (section 479 of ITEPA) less any consideration given for the shares and any expenses incurred on the acquisition (section 480 of ITEPA).
2635.Subsections (2)(b) and (3)(b) modify the basic rule if the option is a qualifying option under the EMI (Enterprise Management Incentives) code. The effect of that code is ignored in calculating the amount of the relief. The EMI code is defined in section 527(3) of ITEPA. A qualifying option is defined in section 527(4) of ITEPA.
2636.This modification is needed to deal with the interaction between sections 476 and 531 of ITEPA. Section 531 of ITEPA sets out how to calculate the amount that counts as employment income under section 476 of ITEPA if the option allows the shares to be acquired at a discount to their market value at the date the option is granted. The amount that counts as employment income is that market value less any consideration given for the option and any consideration given for the shares. This limits the employment income charge on the employee to the amount of the discount.
2637.Subsections (2)(b) and (3)(b) ensure that the company gets a deduction for the market value of the shares at the date they are acquired under the option less any consideration given for the shares and any expenses incurred on the acquisition.
2638.The full out words at the end of subsection (3) are similar to the full out words at the end of section 1011(3). If the shares are convertible shares they are valued on the basis that they are not convertible. This is the normal method of valuation that section 437(1) of ITEPA applies to such shares.
2639.There is a difference between subsections (2) and (3) which is not apparent from the text. This is that the calculation under subsection (2) is made by reference to Chapter 2 of Part 7 of ITEPA, while the calculation under subsection (3) is made by reference to Chapter 3 of that Part. In effect, different rules apply to the calculation under these two subsections. It is therefore possible that the calculations under these two subsections will yield different amounts.
2640.Subsection (4)(a) states the rule that, in calculating the amount of relief given to the company, no deduction is made for the relief given to the employee by sections 481 and 482 of ITEPA. These sections reduce the employment income charge by the amount of certain national insurance contributions paid by the employee.
2641.Subsection (5) rewrites the comparison in paragraphs 21(5) and 22C(5) of Schedule 23 to FA 2003 if the shares are both restricted and convertible. The company may claim relief for the higher figure (as yielded by subsection (2) or (3)) even if the employee has or will be chargeable to tax on a different amount in respect of the shares acquired.
2642.Subsection (6) deals with the case in which the employee dies before the shares are acquired so there is no employment income charge on which to calculate the relief. It is based on paragraph 27(1) of Schedule 23 to FA 2003.
2643.Strictly speaking paragraph 27(1) of Schedule 23 to FA 2003 deems the employee to be alive only for the purposes of the income tax condition in paragraph 14 of Schedule 23 to FA 2003. Subsection (6) extends that treatment to the calculation of the relief.
Section 1020: Reduction in amount of relief
2644.This section restricts the relief if the shares are given partly for employment in a qualifying business and partly for employment in a business that does not qualify. It is based on paragraphs 15, 21 and 22C of Schedule 23 to FA 2003.
2645.Its effect is identical to section 1012.
Section 1021: How the relief is given
2646.This section explains how the relief is given. It is based on paragraph 16 of Schedule 23 to FA 2003 and is identical to section 1013.
Section 1022: Takeover of company whose shares are subject to option
2647.This section gives relief if the company whose shares are to be acquired is taken over and the original option is exchanged for an option over shares in the new company. It is based on paragraph 13 of Schedule 23 to FA 2003.
Section 1023: Supplementary provision for purposes of section 1022
2648.This section gives the definitions needed for the purposes of section 1022. It is based on paragraph 13 of Schedule 23 to FA 2003.
2649.Subsection (3) defines a takeover in terms of one company acquiring control of another. The definition of “control” in section 840 of ICTA applies for this purpose. See section 1316.
Section 1024: Transfer of qualifying business by group transfers
2650.This section gives relief to a new employing company if the business carried on by the original employing company is transferred within a group of companies. It is based on paragraph 23 of Schedule 23 to FA 2003.
2651.The definition of group transfer is in section 1004(3).
2652.Paragraph 23(1)(a) of Schedule 23 to FA 2003 applies the rule rewritten in this section to an award of shares. The rule for relief given by Chapter 2 of this Part is not rewritten here as that Chapter gives no scope for a transfer of the business before the shares are acquired.