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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: exclusions: earmarking for employee share option schemes: specified exit events: fallback charge at end of exit period

Section 554M(7) to (13) ITEPA 2003

The exit period
Case 1: other income tax provisions deal with receipt of shares
Case 2: other income tax provisions deal with receipt of sum
Case 3: option lapses
Fall-back charge at end of exit period
‘Exercise’ of options

If:

  • Section 554M has prevented a relevant step from giving rise to Part 7A income, and
  • the specified exit event, or an exit event within the specified description, occurs,

then there may be a fall-back charge at the end of ‘the exit period’.

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

The end of the exit period 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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The exit period

‘The exit period’ is defined in Section 554M(12) and (13).

Usually, the exit period is:

  • the period of six months starting with the date on which the exit event occurs, or
  • if it ends earlier, the period during which A can exercise the relevant share option in accordance with the deferred grant terms.

But, if the exit event is the admission of shares in the relevant company to trading on a stock exchange, the exit period is:

  • the period of five years starting with the date on which the exit event occurs, or
  • if it ends earlier, the period during which A can exercise the relevant share option in accordance with the deferred grant terms.

On ‘exit events’, see EIM45465.

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

In this case (Section 554M(9)):

  • A exercises the relevant share option (wholly or partly) before the end of the exit period 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, because that would be double counting.

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

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

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

  • A exercises the relevant share option (wholly or partly) before the end of the exit period and, as a result, a sum of money as mentioned in Section 554M(1)(a) see EIM45435 is paid to A before the end of the exit period,
  • this payment 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
  • some earmarked shares are no longer held by any person in relation to the relevant share option, whether because this payment represents the proceeds of their disposal of because the payment is made from another source.

The fall-back charge at the end of the exit period does not apply to such shares, because that would be double counting.

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Case 3: option lapses

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

  • A becomes able to exercise the relevant share option (in whole or in part) before the end of the exit period, but
  • the option lapses (in whole or in part) before the end of that period, 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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Fall-back charge at end of exit period

Otherwise, Section 554M(8) 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 exit period.
  • The subject of the relevant step is:

    • any of the earmarked shares which have fallen outside the three special cases, 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.