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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: exclusions: earmarking for share option schemes: specified vesting date: fall-back charge on final exercise date

Section 554L(8) to (14) ITEPA 2003

Case 1: other income tax provisions deal with receipt of shares
Case 2: other income tax provisions deal with receipt of sum of money
Case 3: the grant is revoked
Case 4: the option lapses
Fall-back charge on final exercise date
‘Exercise’ of options

If Section 554L has prevented a relevant step from giving rise to Part 7A income, there may be a fall-back charge on the date (‘the final exercise date’) which is ten years after the grant date.

But there are four cases in which this fall-back charge will not apply. In practice, taxpayers will normally arrange to come within one of these four cases.

The final exercise date is a non-standard time limit which has no connection with, for example, the end of the tax year or Self Assessment.

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Case 1: other income tax provisions deal with receipt of shares

In this case (Section 554L(10)):

  • A becomes able to exercise the relevant share option (in whole or in part) before the end of the vesting date,
  • A exercises the option (wholly or partly) before the final exercise date and, as a result, receives the relevant shares, and
  • the receipt of the shares gives rise to employment income of A which:

    • is chargeable to income tax, or would be chargeable apart from Section 474 ITEPA 2003 (securities options: cases where Part 7 Chapter 5 ITEPA 2003 does not apply), or
    • is exempt income (see EIM45455).

The fall-back charge on the final exercise date does not apply to those shares.

In this context, ‘receives’ means ‘becomes beneficially entitled to’.

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Case 2: other income tax provisions deal with receipt of sum of money

In this case (Section 554L(11)):

  • A becomes able to exercise the relevant share option (in whole or in part) before the end of the vesting date,
  • A exercises the option (wholly or partly) before the final exercise date and, as a result, receives a sum of money,
  • the payment of the sum gives rise to employment income of A which:

    • is chargeable to income tax, or would be chargeable apart from Section 474 ITEPA 2003 (securities options: cases where Part 7 Chapter 5 ITEPA 2003 does not apply), or
    • is exempt income (see EIM45455), and
  • the payment represents the proceeds of the disposal of earmarked shares, or the payment is made from another source and, correspondingly, the shares are no longer held by any person in relation to the relevant share option.

The fall-back charge on the final exercise date does not apply to those shares.

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Case 3: the grant is revoked

In this case (Section 554L(12)):

  • before the end of the vesting date, in accordance with the deferred grant terms, A ceases to be able to exercise the relevant share option (in whole or in part), and
  • correspondingly, earmarked shares are no longer held by any person in relation to the relevant share option.

The fall-back charge on the final exercise date does not apply to those shares (because the arrangement has been unwound in accordance with the requirements of the legislation).

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Case 4: the option lapses

In this case (Section 554L(13)):

  • A becomes able to exercise the relevant share option (in whole or in part) before the end of the vesting date, but
  • the option lapses (in whole or in part) before the end of the final exercise date, and
  • correspondingly, earmarked shares are no longer held by any person in relation to the relevant share option.

The fall-back charge on the final exercise date does not apply to those shares (because the arrangement has been unwound in accordance with the terms of the legislation).

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Fall-back charge on final exercise date

Otherwise, Section 554L(9) deems a relevant step to be taken with the following features.

  • The relevant step is within Section 554B.
  • It is taken at the end of the final exercise date.
  • The subject of the relevant step is:

    • any of the earmarked shares which have fallen outside the four special cases discussed above, and
    • any ‘relevant income’ in relation to those shares. See EIM45475.
  • The relevant step gives rise to Part 7A income.

The relevant step gives rise to Part 7A income subject to the exclusion in Section 554A(4) (see EIM45095) and any relevant reliefs.

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‘Exercise’ of options

On the ‘exercise’ of options, see EIM45460.