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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: amount of Part 7A income: exercise price of share options: conditions

Section 554Z7 ITEPA 2003

Section 554Z7(1): actual relevant step within Section 554B: actual grant
Section 554Z7(1): actual relevant step within Section 554B: expected grant
Section 554Z7(2): deemed relevant step within Section 554B under Section 554L(9) or 554M(8)
Section 554Z7 and fall-back charges under Sections 554L and 554M

Section 554Z7 deals with discounted and market value options.

In summary, Section 554Z7 adjusts the value of the relevant step in order to reflect the price that A has to pay in order to acquire shares or receive a sum of money on exercising an option.

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Section 554Z7(1): actual relevant step within Section 554B: actual grant

You reduce the value of the relevant step under Section 554Z7 if the seven conditions in Section 554Z7(1) are met. These seven conditions are bulleted below.

  • The relevant step is within Section 554B and is not a deemed relevant step under Section 554L(5), (7) or (9) or Section 554M(4), (6) or (8).
  • B is a company.
  • There is an arrangement (‘B’s employee share scheme’) under which, in respect of A’s employment with B, a right (‘a relevant share option’) may be granted to A:

    • to acquire ‘relevant shares’, or
    • to receive a sum of money the amount of which is to be determined by reference to the market value of any ‘relevant shares’ at the time the sum is paid.

This condition is Section 554Z7(1)(c).

On ‘relevant shares’, see EIM45480.

  • In order to exercise the relevant share option so as to

    • acquire the relevant shares, or
    • receive the sum of money,

A would, under the terms of the option, have to pay a sum of money the amount of which can be determined at the time of the grant of the option. This condition is Section 554Z7(1)(d).

On the ‘exercise’ of options, see EIM45460.

  • The subject of the relevant step is relevant shares (‘earmarked shares’) which are earmarked (or otherwise start being held) solely with a view to providing shares or paying a sum of money pursuant to a relevant share option granted to A under B’s employee share scheme:

    • as mentioned in Section 554Z7(1)(c), and
    • in relation to which the requirements of Section 554Z7(1)(d) are met.
  • E ≤ X, where:

    • ‘E’ is the number of relevant share of any type which are earmarked shares, and
    • ‘X’ is the maximum number of relevant shares of that type which one might reasonably expect to be needed for (1) providing shares pursuant to the relevant share option or (2) paying a sum of money pursuant to the relevant share option.

On ‘the maximum number one might reasonably expect’, see EIM45470.

  • There is no connection (direct or indirect) between the relevant step and a tax avoidance arrangement. See EIM45855.

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Section 554Z7(1): actual relevant step within Section 554B: expected grant

You also reduce the value of the relevant step under Section 554Z7 if the seven conditions in Section 554Z7(1) are met. These conditions are bulleted below.

  • The relevant step is within Section 554B and is not a deemed relevant step under Section 554L(5), (7) or (9) or Section 554M(4), (6) or (8).
  • B is a company.
  • There is an arrangement (‘B’s employee share scheme’) under which, in respect of A’s employment with B, a right (‘a relevant share option’) may be granted to A:

    • to acquire ‘relevant shares’, or
    • to receive a sum of money the amount of which is to be determined by reference to the market value of any ‘relevant shares’ at the time the sum is paid

This condition is Section 554Z7(1)(c).

On ‘relevant shares’, see EIM45480.

  • In order to exercise the relevant share option so as to

    • acquire the relevant shares, or
    • receive the sum of money,

A would, under the terms of the option, have to pay a sum of money the amount of which can be determined at the time of the grant of the option. This condition is Section 554Z7(1)(d).

On the ‘exercise’ of options, see EIM45460.

  • The subject of the relevant step is relevant shares (‘earmarked shares’) which are earmarked (or otherwise start being held) solely with a view to providing shares or paying a sum of money pursuant to a relevant share option which is expected to be granted to A under B’s employee share scheme:

    • as mentioned in Section 554Z7(1)(c), and
    • in relation to which the requirements of Section 554Z7(1)(d) are met.
  • E ≤ X, where:

    • ‘E’ is the number of relevant share of any type which are earmarked shares, and
    • ‘X’ is the maximum number of relevant shares of that type which one might reasonably expect to be needed for (1) providing shares pursuant to the relevant share option or (2) paying a sum of money pursuant to the relevant share option.

On ‘the maximum number one might reasonably expect’, see EIM45470.

  • There is no connection (direct or indirect) between the relevant step and a tax avoidance arrangement. See EIM45855.

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Section 554Z7(2): deemed relevant step within Section 554B under Section 554L(9) or 554M(8)

You also reduce the value of the relevant step under Section 554Z7 if the three conditions in Section 554Z7(2) are met. These conditions are bulleted below.

  • The relevant step is a deemed relevant step under:

    • Section 554L(9) (earmarking for employee share option schemes: specified vesting date: fallback charge on final exercise date), or
    • Section 554M(8) (earmarking for employee share option schemes: specified exit events: fall-back charge at end of exit period).
  • A would, under the terms of the option, have to pay a sum of money in order to exercise the relevant share option to which the step relates so as to:

    • acquire the shares which are the subject of the relevant step, or
    • to receive the sum of money determined by reference to the market value of those shares.
  • The amount of this sum can be determined at the time the option is granted. This is the amount mentioned in Section 554Z7(2)(b).

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Section 554Z7 and fall-back charges under Sections 554L and 554M

Section 554Z7 can reduce a fall-back charge under Section 554L(9) or 554M(8) but only if the conditions in Section 554Z7(2) are met.

Section 554Z7 cannot reduce any other fall-back charges under Section 554L or 554M.

  • On the fall-back charges under Section 554L generally, see EIM45405 under ‘Section 554L: later events’.
  • The fall-back charge under Section 554L(9) arises on the final exercise date. On this fall-back charge, see EIM45415.
  • On the fall-back charges under Section 554M generally, see EIM45435 under ‘Section 554M: later events’.
  • The fall-back charge under Section 554M(8) arises at the end of the exit period. On this fallback charge, see EIM45440.