Office of Public Sector Information
PART 7 continued CHAPTER 3 continued
(1) The taxable amount for the purposes of section 438 (charge on conversion of shares) is—
MV - DA
where—
MV is the market value of the shares into which the convertible shares are converted at the time of the conversion, and
DA is the total of any deductible amounts.
(2) For the purposes of subsection (1) each of the following is a “deductible amount”—
(a) the amount or value of any consideration given for the convertible shares or for the interest in them;
(b) the amount or value of any consideration given for the conversion;
(c) any amount that constitutes earnings from the employee’s employment under Chapter 1 of Part 3 (earnings) in respect of the acquisition of the convertible shares or the interest in them;
(d) any amount that is treated as earnings from the employee’s employment under Chapter 8 of Part 3 (taxable benefits: notional loans in respect of acquisitions of shares) in respect of the acquisition;
(e) if the convertible shares were, or the interest in them was, acquired by the exercise of a share option, any amount that counts as employment income of the employee under section 476 (charge on employee on exercise etc. of option) in respect of the exercise; and
(f) if the convertible shares were, or the interest in them was, acquired through a series of conversions each of which was a taxable conversion, the taxable amount for each conversion, so far as not falling within paragraph (c), (d) or (e).
(3) If, not later than the conversion, an event occurred in respect of the shares by virtue of which an amount counts as employment income of the employee under—
(a) section 449 (charge on occurrence of chargeable event), or
(b) section 453 (charge on increase in value of shares of dependent subsidiary),
that amount is a “deductible amount” for the purposes of subsection (1).
(4) Section 541(2) (effects of the EMI code on other income tax charges) also provides that an amount is to be regarded as a “deductible amount” for the purposes of subsection (1).
(5) For the purposes of subsection (1) the “market value” of shares means the amount that might reasonably be expected to be obtained from a sale of the shares in the open market.
(6) In subsection (2) “taxable conversion” means a conversion which—
(a) resulted in an amount counting as employment income under section 438, or
(b) would have done so but for the fact that the market value of the shares at the time of the conversion did not exceed the sum of the deductible amounts.
(7) The reference in subsection (3) to an event includes the expiry of a period.
(1) Section 438 (charge on conversion of shares) does not apply if—
(a) the conversion is a conversion of shares of one class only (“the original class”) into shares of one other class only (“the new class”), and
(b) all shares of the original class are converted into shares of the new class, and
(c) condition A or B is met.
(2) Condition A is that immediately before the conversion the majority of the company’s shares of the original class are not held by or for the benefit of—
(a) directors or employees of the company,
(b) an associated company of the company, or
(c) directors or employees of such an associated company.
(3) Condition B is that immediately before the conversion the company is employee-controlled by virtue of holdings of shares of the original class.
(4) A company is “employee-controlled” by virtue of holdings of shares of a class if—
(a) the majority of the company’s shares of that class (other than any held by or for the benefit of an associated company) are held by or for the benefit of employees or directors of the company or a company controlled by the company, and
(b) those directors and employees are together able as holders of the shares to control the company.
(5) In this section “associated company” has the meaning given by section 416 of ICTA.
(1) Section 438 (charge on conversion of shares) does not apply if the interest which the employee acquires in the shares into which the convertible shares are converted is an interest which is only conditional.
(2) “Only conditional” has the same meaning as in Chapter 2 of this Part (see section 424).
(1) This section applies for the purposes of section 439 (amount of charge) in determining the amount or value of the consideration given for the convertible shares, or for the interest in them, or for the conversion.
(2) Subject to the following provisions of this section, the consideration given for the convertible shares, or for the interest in them, is any consideration given in respect of the acquisition by—
(a) the employee, or
(b) if section 436(1)(c) applies, the person by whom the shares were, or interest was, acquired.
(3) The amount or value of the consideration given by a person for shares, or an interest in shares, includes the amount or value of any consideration given for a right to acquire the shares or interest.
(4) If any consideration is given partly in respect of one thing and partly in respect of another, the amount given in respect of the different things is to be determined on a just and reasonable apportionment.
(5) The consideration which for the purposes of this section is taken to be given wholly or partly for anything does not include the performance of any duties of, or in connection with, the office or employment by reference to which the shares or interest in question have been acquired by a person as a director or employee of a company.
(6) No amount is to be counted more than once in calculating the amount or value of any consideration.
(1) This section applies for the purposes of section 442(3) in determining the amount or value of any consideration given for a right to acquire shares.
(2) Subsection (3) applies if the right to acquire shares (“the new option”) is the whole or part of the consideration for the assignment or release of another right to acquire shares (“the old option”).
(3) The amount or value of the consideration given for the new option is to be treated as being the sum of—
(a) the amount by which the amount or value of the consideration given for the grant of the old option exceeds the amount or value of any consideration for the assignment or release of the old option, apart from the new option, and
(b) any valuable consideration given for the grant of the new option, apart from the old option.
(4) Two or more transactions are to be treated for the purposes of subsection (2) as a single transaction by which a right to acquire shares is assigned for a consideration which consists of or includes another right to acquire shares if—
(a) the transactions result in—
(i) a person ceasing to hold a right to acquire shares, and
(ii) that person or a connected person coming to hold another right to acquire shares, and
(b) one or more of the transactions is effected under arrangements to which two or more persons who hold rights to acquire shares, in respect of which there may be liability to tax under Chapter 5 of this Part (share options), are parties.
(5) Subsection (4) applies regardless of the order in which the assignment and the acquisition occur.
(6) In this section “release” includes agreeing to the restriction of the exercise of the right.
(1) Subsection (2) applies if—
(a) the employee dies holding an interest in convertible shares,
(b) those shares are converted into shares of a different class either on, or within 12 months after, the death, and
(c) the conversion takes place wholly or partly as a consequence of the death.
(2) This Chapter applies as if the conversion had taken place immediately before the death and had been in pursuance of an entitlement to convert conferred on the deceased.
(1) Subsection (2) applies if—
(a) a person has provided an individual with convertible shares in a company, or an interest in such shares,
(b) those shares are subsequently converted into shares of a different class, and
(c) the circumstances are such that the conversion results or may result in an amount counting as employment income of that individual under section 438 (charge on conversion of shares).
(2) Each of the following persons—
(a) the person who provided the shares or interest, and
(b) the employer company,
must provide the Inland Revenue with particulars in writing of the shares and their conversion.
(3) The particulars must be provided before 7th July in the tax year following that in which the conversion takes place.
(1) In this Chapter—
“director”—
in the case of a company whose affairs are managed by a board of directors or similar body, means a member of that board or similar body,
in the case of a company whose affairs are managed by a single director or similar person, means that director or person,
in the case of a company whose affairs are managed by its members, means a member,
and includes any person who is to be or has been a director;
“employee” includes—
in relation to a company, a person taking part in the management of the affairs of the company who is not a director, and
a person who is to be or has been an employee;
“shares” (except in section 436 in the expression “an interest in shares which is only conditional”) includes stock and any other interest of a member of a company;
“terms” on which a person holds shares or an interest in shares means terms imposed by contract or arrangement or in any other way.
(2) In this Chapter—
“the employee”,
“the employer company”, and
“the shares”,
have the meaning indicated in section 435(1) and (4).
(1) This Chapter applies where a person (“the employee”)—
(a) acquires shares or an interest in shares in a company, and
(b) does so as a director or employee of that or another company.
(2) In this Chapter (unless the context indicates a different meaning)—
“the acquisition” means the acquisition of shares or an interest in shares mentioned in subsection (1)(a);
“the shares” means the shares mentioned there;
and “director” and “employee” have the extended meaning given by section 470(1).
(3) The company as a director or employee of which the employee acquires the shares or the interest in them is “the employer company” for the purposes of this Chapter.
(4) For the purposes of this Chapter a person (“E”) acquires shares or an interest in shares “as a director or employee” of a company if E acquires the shares or interest in pursuance of—
(a) a right conferred on, or an opportunity offered to, E by reason of E’s office as a director of, or E’s employment by, the company; or
(b) a right assigned to E after having been conferred on some other person by reason of E’s office as a director of, or E’s employment by, the company.
(5) In addition, if a person (“A”) acquires shares or an interest in shares in a company in pursuance of a right conferred on, or opportunity offered to, A as a person connected with a director or employee of that or another company (“the company”), the director or employee is to be treated for the purposes of this Chapter—
(a) as acquiring the shares or interest “as a director or employee” of the company, and
(b) as holding any beneficial interest in the shares for the time being held by A;
and subsections (1) to (3) apply accordingly.
(6) Section 463 provides for a person to be treated as continuing to have a beneficial interest in shares until there is a qualifying disposal for the purposes of that section.
(1) This Chapter does not apply where a person has acquired shares or an interest in shares as a director or employee of a company if the earnings from the office or employment in question were not (or would not have been if there had been any) general earnings to which section 15 or 21 applies (earnings for year when employee resident and ordinarily resident in the UK).
(2) This Chapter does not apply where a person has acquired shares or an interest in shares under the terms of an offer to the public.
(3) In a case within section 544(1) (exemption for priority share allocations where offer to employees separate from public offer), any acquisition made under the terms of either the public offer or the employee offer within the meaning of that section is to be treated for the purposes of this Chapter as made under the terms of an offer to the public.
(4) Subsection (3) applies whether or not there is any benefit within section 544(2) (benefit derived from entitlement to priority allocation exempt from income tax).
(1) This section applies if a chargeable event occurs in relation to the shares at a time when the employee has not ceased to have a beneficial interest in them.
(2) The taxable amount determined under section 451 counts as employment income of the employee for the relevant tax year.
(3) The “relevant tax year” is the tax year in which the chargeable event occurs.
(4) Section 450 explains what are chargeable events for the purposes of this section.
(5) This section is subject to—
section 452 (cases outside charge under this section),
section 494 (approved SIPs: no charge on removal of restrictions),
section 520 (approved SAYE option schemes: no charge in respect of post-acquisition benefits), and
section 525 (approved CSOP schemes: no charge in respect of post-acquisition benefits).
(1) This section applies for the purposes of section 449 (charge on occurrence of chargeable event).
(2) Unless excluded by subsection (4), any of the events mentioned in subsection (3) is a “chargeable event” in relation to shares in a company if it increases the value of the shares or would do so but for the occurrence of some other event.
(3) The events are—
(a) the removal or variation of a restriction applying to the shares,
(b) the creation or variation of a right relating to the shares,
(c) the imposition of a restriction applying to other shares in the company,
(d) the variation of a restriction applying to other shares in the company, and
(e) the removal or variation of a right relating to other shares in the company.
(4) An event within subsection (3) is not a “chargeable event” if the restriction or right applies to all shares of the class concerned and any of the following conditions is met at the time of the event—
(a) the company is employee-controlled because of holdings of shares of the relevant class;
(b) the majority of the company’s shares of the relevant class are held by outside shareholders;
(c) the company is a 51% subsidiary with shares of a single class.
(5) “The relevant class” means the class of shares to which the shares belong.
(6) References in this section—
(a) to restrictions to which shares are subject, or
(b) to rights relating to shares,
are references to such restrictions imposed or rights conferred by contract, arrangement or in any other way.
(1) The taxable amount for the purposes of section 449 (charge on occurrence of chargeable event) is—
(a) the amount by which the value of the shares is increased by the chargeable event, or
(b) if that amount is affected by the occurrence of some other event, the amount by which that value would have been increased but for that other event.
(2) If the interest of the employee is less than full beneficial ownership, the taxable amount is an appropriate proportion of the amount mentioned in subsection (1)(a) or (b).
(1) Section 449 (charge on occurrence of chargeable event) does not apply in the following cases.
(2) Section 449 does not apply if, by virtue of section 427 (charge on interest ceasing to be only conditional, etc.), an amount counts as employment income of the employee in respect of the chargeable event.
(3) Section 449 does not apply in relation to shares in a company if the employee has not, at any time in the period of 7 years ending with the date on which the chargeable event occurs, been a director or employee of—
(a) the employer company;
(b) if different, the company whose shares they are; or
(c) an associated company of a company within paragraph (a) or (b).
(4) Section 449 does not apply in relation to shares in a company which—
(a) was a dependent subsidiary at the time of the acquisition, or
(b) is a dependent subsidiary immediately before the time of the chargeable event.
(5) But in such a case section 453 (charge on increase in value of shares of dependent subsidiaries) may apply.
(1) This section applies if the shares are shares in a company—
(a) which was a dependent subsidiary at the time of the acquisition, or
(b) which was not then a dependent subsidiary but becomes one before the employee ceases to have a beneficial interest in the shares,
and (in either case) there is a chargeable increase in the value of the shares.
(2) The taxable amount determined under section 455 counts as employment income of the employee for the relevant tax year.
(3) The “relevant tax year” is the tax year which includes the appropriate time (within the meaning of section 454(2) or (4)) by reference to which the chargeable increase is determined under that provision.
(4) Section 454 explains what are chargeable increases for the purposes of this section.
(5) This section is subject to—
section 456 (cases outside charge under this section),
section 495 (approved SIPs: no charge on increase in value of shares),
section 520 (approved SAYE option schemes: no charge in respect of post-acquisition benefits), and
section 525 (approved CSOP schemes: no charge in respect of post-acquisition benefits).
(1) This section applies for the purposes of section 453 (charge on increase in value of shares of dependent subsidiary).
(2) In a case within section 453(1)(a) (dependent subsidiary at time of the acquisition) there is a “chargeable increase” in the value of the shares if the value of the shares at the appropriate time exceeds their value at the time of the acquisition.
(3) In subsection (2) “the appropriate time” means whichever is the earlier of—
(a) the end of the period of 7 years after the date of the acquisition, and
(b) the time when the employee ceases to have a beneficial interest in the shares.
(4) In a case within section 453(1)(b) (company becoming dependent subsidiary after time of acquisition) there is a “chargeable increase” in the value of the shares if the value of the shares at the appropriate time exceeds their value at the time when the company becomes a dependent subsidiary.
(5) In subsection (4) “the appropriate time” means whichever is the earlier or earliest of—
(a) the end of the period of 7 years after the date on which the company becomes a dependent subsidiary,
(b) the time when the employee ceases to have a beneficial interest in the shares, and
(c) if the company ceases to be a dependent subsidiary, the time when it does so.
(1) The taxable amount for the purposes of section 453 (charge on increase in value of shares of dependent subsidiary) is—
I - DA
where—
I is the amount of the chargeable increase in value of the shares, and
DA is the total of any deductible amounts.
This is subject to subsections (3) and (4).
(2) For the purposes of subsection (1)—
(a) if the consideration for the acquisition is subsequently increased in accordance with the terms on which the acquisition was made, the amount of that increase is a “deductible amount”;
(b) if, before the time by reference to which the chargeable increase is determined, an event occurs in respect of the shares by virtue of which an amount counts as employment income of the employee under—
(i) Chapter 2 of this Part (conditional interests in shares), or
(ii) Chapter 3 of this Part (convertible shares),
that amount is a “deductible amount”.
(3) If, in accordance with the terms on which the acquisition was made, the employee subsequently ceases to have a beneficial interest in the shares as the result of a disposal made for a consideration which is less than the value of the shares or the employee’s interest in them at the time of the disposal, the amount “I” in subsection (1) is—
(a) if the disposal is within section 454(3)(b), an amount equal to the excess of that consideration over the value of the shares or interest at the time of the acquisition, or
(b) if the disposal is within section 454(5)(b), an amount equal to the excess of that consideration over the value of the shares or interest at the time of the company becoming a dependent subsidiary.
(4) If the interest of the employee is less than full beneficial ownership, the amount “I” in subsection (1) is an appropriate proportion of the amount that it would be apart from this subsection.
(1) Section 453 (charge on increase in value of shares of dependent subsidiary) does not apply in the following cases.
(2) Section 453 does not apply if—
(a) the chargeable increase arises in relation to a disposal of the employee’s beneficial interest in the shares, and
(b) by virtue of section 427 (charge on interest ceasing to be only conditional, etc.), an amount counts as employment income of the employee in respect of the disposal.
(3) Section 453 does not apply in relation to shares in a company within subsection (1)(b) of that section (company becoming a dependent subsidiary after acquisition) if the employee has not, at any time in the period of 7 years ending with the date on which the company became a dependent subsidiary, been a director or employee of—
(a) the employer company,
(b) if different, the company whose shares they are, or
(c) an associated company of a company within paragraph (a) or (b).
(1) This section applies if a person within subsection (2) receives a chargeable benefit by virtue of that person’s ownership of or interest in the shares.
(2) The persons within this subsection are—
(a) the employee;
(b) the person referred to as “A” in section 447(5) (shares acquired by connected person), in a case where that provision applies in relation to the shares;
(c) any other person, in a case where the employee is for the time being treated as continuing to have a beneficial interest in the shares by virtue of section 463 (disposals of shares to connected persons etc. ignored).
(3) The taxable amount determined under section 459 counts as employment income of the employee for the relevant tax year.
(4) The “relevant tax year” is the tax year in which the benefit is received.
(5) Section 458 explains what are chargeable benefits for the purposes of this section.
(6) This section—
(a) does not apply if the benefit is otherwise chargeable to income tax, and
(b) is subject to section 460 (cases outside charge under this section).
(1) This section applies for the purposes of section 457 (charge on other chargeable benefits from shares).
(2) A benefit received by a person is a “chargeable benefit” if subsection (3), (4) or (5) applies to the benefit.
(3) This subsection applies to a benefit if, at the time when it becomes available, it is available to less than 90% of the persons who then hold shares of the same class as the shares.
(4) This subsection applies to a benefit if, at the time when it is received—
(a) the company is a dependent subsidiary, and
(b) its shares are of a single class.
(5) This subsection applies to a benefit if, at the time when it is received, none of the conditions in subsection (6) is met.
(6) The conditions are—
(a) that the majority of the company’s shares in respect of which the benefit is received are held by outside shareholders;
(b) that the company is employee-controlled by virtue of holdings of shares of the same class as the shares;
(c) that, in a case where the company is a 51% subsidiary which is not a dependent subsidiary, the majority of its shares in respect of which the benefit is received are held otherwise than by or for the benefit of—
(i) directors or employees of the company,
(ii) a company which is an associated company of the company but is not its parent company, or
(iii) directors or employees of a company which is an associated company of the company.
(7) For the purposes of this section—
(a) “the company”, in relation to the shares (see section 457(1)), means the company whose shares they are; and
(b) a company (“P”) is the “parent company” of another company (“S”) if S is a 51% subsidiary of P.
The taxable amount for the purposes of section 457 (charge on other chargeable benefits) is the amount which the person receiving the benefit might reasonably expect to obtain from a sale in the open market.
Section 457 (charge on other chargeable benefits) does not apply in relation to shares in a company if the employee has not, at any time in the period of 7 years ending with the date on which the benefit is received, been a director or employee of—
(a) the employer company,
(b) if different, the company whose shares they are, or
(c) an associated company of a company within paragraph (a) or (b).
Income Tax (Earnings and Pensions) Act 2003