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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

Schedule 3 SAYE option schemes: Taxation: Income tax consequences for participants

Section 519 ITEPA provides favourable tax treatment for options granted and exercised under Schedule 3 SAYE option schemes in certain circumstances.

Section 519 sets out the conditions to obtain income tax relief when employees and directors acquire shares by virtue of exercising Schedule 3 SAYE share options and these are set out at (1) to (3) below.

  1. The individual must exercise the option in accordance with the provisions of the SAYE scheme at a time when the scheme remains a Schedule 3 option scheme and either condition A or B is met OR the option exercise event is a takeover that meets the requirements of Section 519(3A) – (3J).
  • Condition A is that option is exercised on after the third anniversary of the date of grant.
  • Condition B is that option is exercised before the third anniversary of the date of grant for any of the mandatory provisions provided for in paragraph 34(2) – injury, disability, redundancy or retirement, a sale of business that is a TUPE transfer or a change of control of the employing company, (ETASSUM35370).
  • FA13- inserted Section 519(3A) – (3J) provide that the option is exercised before the third anniversary of the date of grant and that several other conditions should be met including the corporate event being a cash takeover pursuant to paragraphs 37(2), (4), (4A) and (6) (a general offer, compromise or arrangement, non-UK company reorganisation arrangement or takeover offer), the option holder having to receive cash (and no other asset) in exchange for the shares acquired on exercise, the option being granted before the offer was under consideration or made, and there having been no opportunity for option exchange under paragraph 38, (ETASSUM35500).
  1. The avoidance of tax or NICs is not the main purpose (or one of the main purposes) of any arrangement under which the option was granted or exercised.
  2. Where tax advantaged status is withdrawn as a result of a “serious” error (see ETASSUM37090), paragraph 40H(4) of Schedule 3 (from 6 April 2014) provides for an SAYE share option to be treated as a Schedule 3 SAYE share option at the time it is exercised provided that it was granted before the scheme ceased to be a Schedule 3 SAYE option scheme in accordance with the provision at paragraph 40H(1)/(2).

Options granted before 6 April 2014 under a SAYE option scheme which had been approved by HMRC before that date are deemed to be granted under a Schedule 3 SAYE option scheme (Paragraph 154(5)/(6) of FA 2014) so long as this scheme has been registered by 6 July 2015.

If the event giving rise to the exercise of the option is a sale or transfer of the business or division in which the participant is employed, tax relief may be available (paragraph 34(2)) if such transfer constitutes (i) the sale of a business that is a TUPE transfer (34(2)(c)), (this also constitutes ‘redundancy’ for statutory share scheme purposes (34(2)(a)) or (ii) the employing company ceasing to be an associate of the scheme organiser by reason of a change of control (34(2)(d)), (see ETASSUM35380 and ETASSUM35530).

Chapter 7 of Part 7 of ITEPA provides for exemptions to income tax for share options granted under a Schedule 3 option scheme and for amounts to count as employment income in certain circumstances in connection with such options. Share options granted otherwise than in accordance with a Schedule 3 SAYE option scheme will be subject to the provisions of Chapter 5 of Part 7 ITEPA as will options granted under a Schedule 3 SAYE option scheme and exercised in circumstances other than those set out in Section 519 (see above).