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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

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HM Revenue & Customs
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Schedule 2 Share Incentive Plan (SIP): Company reconstructions: Cash takeovers

Under Section 498(3)(b) ITEPA 2003 there is no income tax charge where, in respect of relevant (Schedule 2 SIP) shares the participant has no choice but to accept cash and no other assets during the holding period in exchange for shares withdrawn from a plan as a result of;

  1. a compromise, arrangement or scheme affecting the Schedule 2 SIP shares,
  2. a change of control of the company whose shares are scheme shares (referred to subsequently as the ‘relevant’ company) as a result of a general offer, or
  3. the controlling shareholder becoming bound or entitled under Sections 979-985 Companies Act 2006 to acquire shares in the relevant company held by a minority of shareholders following a takeover.

Income tax relief is only available where the participant has no choice but to accept cash in exchange for the shares. Where the participant has a choice (including where the choice was in the original offer) and the participant chooses to accept cash rather than the alternative, no tax relief is available. Equally where the participant was offered the chance to roll over their shares, but chose cash, no income tax relief is available.

Tax relief is not available where it is reasonable to suppose that the shares would not have been awarded had the cash takeover not been in place or under consideration (Section 498(6)). For this purpose dividend shares are ‘awarded’ when the shares are acquired by the trustees on the participant’s behalf (Section 498(7)).

The avoidance of tax or NICs must not have been one of the main purposes for the award.

Compromise, arrangement or scheme

A compromise, arrangement or scheme may take many forms but includes a court-sanctioned scheme of arrangement under Section 899 Companies Act 2006 or overseas legislation. The compromise, arrangement or scheme must be applicable or affect (Section 498(9)):

  • all the ordinary share capital of the company or all the shares of the class in question (in which case only plan shares of that class can be subject of the participants’ directions); or
  • all the shares (or all the shares of the class in question) held by a class of shareholders. The ‘class’ in question cannot be defined by reference to their employment or participation in a Schedule 2 SIP, thus ensuring that Schedule 2 SIP participants or employees generally cannot be treated differently from other shareholders.

General Offers

A general offer must satisfy two conditions (Section 498(10)):

  • it is made to holders of shares of the same class as the participant’s Schedule 2 SIP shares or to holders of shares in the same company; and
  • it is made in the first instance on a condition such that, if satisfied, the offeror will control the company within the meaning of section 450 and 451 CTA2010.

An offer will be a general offer for these purposes even if it is made to different shareholders by different means (Section 498(11)). So for example, in the case of a management buyout, shares held by participating managers may be subject to separate agreements.