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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Employment income provided through third parties: exclusions: share schemes etc: exchange of earmarked shares

Where earmarked shares are exchanged for shares in a different company, say on takeover or reorganisation, the treatment of the original earmarking, and of any new earmarking, will depend on the circumstances.

Original award remains in place

If:

  • there is an exchange of shares, and
  • the award in respect of which the original shares were earmarked remains in place (and this is permitted by the terms of the award),

then, in normal circumstances, there will be no fall-back charge in respect of the originally earmarked shares at that point in time.

The new shares will be regarded as earmarked with a view to meeting the existing award, with the vesting date of the award (as it was at the time the award was made) remaining as an occasion for a potential fall-back charge.

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New award replaces the original award

If:

  • earmarked shares are exchanged for shares in a different company in similar circumstances, but
  • the award in respect of which the original shares were earmarked is replaced by a new award over the new shares and with a new vesting date,

then the position might be different.

If the original relevant shares do not continue to be held and the old award has been revoked in accordance with the terms of the award, then there will be no charge in respect of the original earmarking.

If the new award and the new earmarking qualify on their own terms for exclusion, then normally there will be no earmarking charge at that stage in respect of the new award.

However, if the replacement of existing awards by new awards is used to circumvent the time limits of the exclusion provisions, so as to exclude indefinitely a Part 7A charge from what is essentially the same earmarking, then the anti-avoidance clauses in those provisions will give rise to an earmarking charge in respect of the replacement awards.