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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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PAYE: special type of income: conversion of shares

Section 699 ITEPA 2003

There are specific rules in Part 7 Chapter 3 ITEPA 2003 concerning convertible shares. The rules determine when a tax charge arises and the amount that counts as employment income of an employee in respect of convertible shares (see Share Schemes Manual, SSM4.13).

These rules were amended by Schedule 22 FA 2003 with effect from 1 September 2003. The guidance below relates to any event occurring before 1 September 2003 that gives rise to acharge to tax under the original legislation at Part 7 Chapter 3 ITEPA 2003. For any event occurring on or after 1 September 2003 that gives rise to a charge under the substituted legislation at Part 7 Chapter 3 see EIM12230.

What are convertible shares?

Broadly, convertible shares are shares that carry an immediate or conditional entitlement to convert them into shares of a different class. Depending on the circumstances, an amount may be chargeable to tax as employment income under Section 438 ITEPA 2003 when the shares are converted.

Where there is an amount chargeable to tax as employment income by virtue of Section 438, the employer is required to operate PAYE if Section 699 ITEPA 2003 applies.

When does Section 699 apply?

Section 699 ITEPA 2003 applies if:

  • at a time when the employee has a beneficial interest in them, shares are converted into shares of a different class as a result of an entitlement to convert them conferred on the holder, or
  • the employee dies holding an interest in convertible shares and those shares are converted within 12 months of the employee’s death wholly or partly as a consequence of the death

and, as a result, an amount is chargeable on any person under Section 438(1) ITEPA2003.

How does Section 699 apply?

If Section 699 ITEPA 2003 applies, the employee is treated as if he or she was provided by reason of the employment, and at the time of conversion, with shares in the nature of the shares into which the original shares have been converted. If those shares would be readily convertible assets, then the employer is required to operate PAYE.

The amount on which the employer is required to operate PAYE is the employer’s best estimate of the amount likely to be chargeable to tax as employment income under Part 7 Chapter 3 ITEPA 2003.