Part 2: Capital Gains Tax exemption for employee shareholder shares
28.Part 2 of the Schedule amends the Taxation of Chargeable Gains Act 1992 (TCGA).
29.Paragraph 18 of the Schedule inhibits the operation of the no gain no loss provisions for transfers between spouses and civil partners ensuring that the transferor benefits fully from the CGT relief and the transferee has a base cost on acquisition of the market value of the shares at the time of the transfer.
30.Paragraph 19 amends section 149AA of TCGA so that amounts treated as earnings for income tax purposes under Chapter 1 of Part 3 or new section 226A of ITEPA are deductible in computing gains and losses on employee shareholder shares, but no other consideration is treated as having been given for the acquisition of those shares.
31.Paragraph 20 introduces six new sections into Part 7 of TCGA relating to employee shareholders. These new sections provide for exemption from CGT and impose an upper limit on the value of the shares to which the exemption applies.
New section 236B of TCGA: Exemption for employee shareholder shares
32.New section 236B of TCGA provides that gains on exempt employee shareholder shares are not chargeable gains when the shares are disposed of by the person who acquired them under an employee shareholder agreement, and defines exempt employee shareholder shares as employee shareholder shares which meet the further requirements in new sections 236C and 236D of TCGA.
33.New subsection (3) defines various terms used in the new sections 236B to 236G of TCGA.
New section 236C of TCGA: Only first £50,000 of shares under associated agreements to be exempt
34.New subsection (1) provides that an employee shareholder share is exempt if, when it is acquired, the total value of all employee shareholder shares acquired under the relevant employee shareholder agreement, and under certain other employee shareholder agreements, does not exceed £50,000.
35.New subsections (2) and (3) provide that for the purpose of applying the £50,000 limit in new subsection (1), any shares acquired under previous employee shareholder agreements with the same employing company, or with associated companies, are taken into account.
36.New subsection 4(a) defines two companies as associated if either one has control of the other, or both are under the control of the same person or persons. New subsection (4)(b) provides that where one company controls another when an employee shareholder agreement is made with an individual, that control is treated as continuing if a subsequent employee shareholder agreement is made with the same individual.
37.New subsection (5) excludes from new subsection 4(b) certain cases where a person who was an employee shareholder with a company that has been dissolved becomes an employee shareholder with an associated company. This is subject to two years having passed between the dissolution of the company in question and the subsequent employee shareholder agreement, during which time that individual has not been employed or engaged by any company associated with the dissolved company.
38.New subsections (6) and (7) provide a means of determining which employee shareholder shares are treated as exempt where the number of shares acquired on a day takes the recipient over the £50,000 limit. The shares are deemed to be acquired in two tranches, one of which consists of the maximum number which may be acquired without breaching the £50,000 limit.
39.New subsections (8) and (9) provide for the value ascribed to shares on their acquisition to be their unrestricted market value and define ‘unrestricted market value’ as what the shares’ market value would be but for any restrictions which apply to them (that is to say, any provision relating to the shares made by any contract, agreement, arrangement or condition). ‘Restriction’ follows the definition in section 432(8) of ITEPA.
New section 236D of TCGA: Shares not exempt if shareholder or connected person has material interest in company
40.New section 236D of TCGA prevents an individual from benefiting from exemption on employee shareholder shares where they, or persons connected with them, have a material interest in their employer or a parent company of their employer; or have had such a material interest at any time in the 12 months prior to the acquisition of employee shareholder shares. New subsections (1) and (2) set out this condition.
41.New subsections (4) and (5) define a material interest for the purposes of this condition. New subsection (4) provides that an individual has a material interest in a company if at least 25 per cent of the voting rights in that company are exercisable by that individual, by persons connected with that individual, or by the individual and persons connected with them together. New subsection (5) provides that in the case of a close company, an individual has a material interest if, in any circumstances, at least 25 per cent of the net assets of the company would be available for distribution to that individual, persons connected with that individual, or the individual and persons connected with them together.
42.New subsection (7) provides that for the purposes of this condition, an individual has a material interest in a company if they, or persons connected with them, have an entitlement to acquire rights that would give them a material interest in the company. This also applies where an individual and any connected persons together have such an entitlement.
43.New subsection (8) provides that for the purposes of this condition, an individual has a material interest in a company if there are arrangements in place that would enable them, or persons connected with them, to acquire such an interest. This also applies where such arrangements would enable an individual and any connected persons together to acquire a material interest in a company.
44.New subsection (9) provides definitions for ‘arrangements’ and other terms used in this section.
New section 236E of TCGA: Identification of exempt employee shareholder shares
45.New subsection (1) disapplies the share pooling and share identification rules in TCGA, which would normally apply both to exempt employee shareholder shares and to non-exempt employee shareholder shares taken together.
46.New subsections (2) and (3) permit a person who holds both exempt and non-exempt employee shareholder shares of the same class in a company, and who disposes of shares of that class to specify how many exempt shares they have sold (up to number they held).
47.New subsection (4) defines what is meant by shares in a company being ‘of the same class’ for the purposes of this section.
New section 236F of TCGA: Reorganisation of share capital involving employee shareholder shares
48.New section 236F of TCGA provides that the rules at section 127 of TCGA, which apply to shares involved in reorganisations of share capital, schemes of reconstruction or in share exchanges, do not apply to exempt employee shareholder shares
New section 236G of TCGA: Relinquishment of employment rights is not disposal of an asset
49.New section 236G of TCGA ensures that for capital gains tax purposes an individual is treated as having made no disposal of any asset in consideration of entering into an employee shareholder agreement.
