EIM45335 - Employment income through third parties: exclusions: loan to exercise employment-related securities option

Section 554N ITEPA 2003

Section 554N prevents a relevant step within section 554C(1)(a) from giving rise to Part 7A income if the four conditions in section 554N(13) are met.

On section 554C(1)(a), see EIM45060.

Conditions

These are the 4 conditions.

  • The relevant step is the payment of a sum of money by way of loan (‘the relevant loan’).
  • The relevant loan is made and used solely for the purpose of enabling A to exercise an ‘employment-related securities option’ (within the meaning of Part 7 Chapter 5 ITEPA 2003). See ERSM110010 onwards.

Note that this condition will not be met if the relevant loan is also:

  • made for the purpose of enabling A to pay tax or NIC or both crystallised by the exercise of the option,
  • used for that purpose, or
  • both made and used for that purpose.

Note also that ‘employment-related securities option’ has a wide meaning. For example, it is capable of covering a long term incentive plan under which A will be awarded shares automatically at a future date if specified conditions are met see ERSM110030.

  • A’s exercise of the option gives rise to employment income of A which:
  • is chargeable to Income Tax (or would be chargeable, but for Section 474 ITEPA 2003 (securities options: cases where Part 7 Chapter 5 does not apply)), or
  • is exempt income (see EIM45455).
  • There is no connection (direct or indirect) between the relevant step and a tax avoidance arrangement. See EIM45855.

On the ‘exercise’ of options, see EIM45460.

Fall-back charge

Under section 554N(14), there will be a fall-back charge if:

  • this exclusion has prevented a relevant step from giving rise to Part 7A income, and
  • by the end of the period of 40 days starting with the day on which the relevant step is taken, the relevant loan has not been fully repaid.

In such a case, section 554N(15) deems a relevant step to be taken with the following features:

  • the relevant step is within section 554C(1)(a)
  • it is taken at the end of the relevant period
  • the subject of the relevant step is a sum of money of an amount equal to the outstanding amount of the relevant loan as at the end of the relevant period
  • the ‘relevant person’ (see EIM45090) in relation to the relevant step is the person to whom the relevant loan is made
  • the relevant step gives rise to Part 7A income.