International: impact of residence and domicile status on employment-related securities & options - up to 5 April 2015
The acquisition of securities is normally charged as money’s worth within general earnings of the employee. Where this is the case, the effect of the residence, ordinary residence and domicile status of the employee on the charge is precisely the same as with cash earnings. (See the Employment Income Manual, EIM40002, EIM42201 and EIM42202)
Up until 5 April 2008 the effect of residence and domicile status on the taxation of general earnings was governed by:
- ITEPA03/S15 (earnings for year when employee resident, ordinarily resident and domiciled in UK)
- ITEPA03/S21 (earnings for year when employee resident and ordinarily resident but not domiciled in UK (non-domiciled), except chargeable overseas earnings)
- ITEPA03/S22 (chargeable overseas earnings for year when employee resident and ordinarily resident, but not domiciled, in UK)
- ITEPA03/S25 (UK-based earnings for year when employee resident, but not ordinarily resident, in UK (R/NOR))
- ITEPA03/S26 (Foreign earnings for year when employee resident, but not ordinarily resident, in UK)
- ITEPA03/S27 (UK-based earnings for year when employee not resident in UK)
Finance Act 2008 made changes to these provisions such that from 6 April 2008:
- sections 21 and 25 are omitted;
- section 15 now deals with earnings for a year when the employee is UK resident;
- section 22 deals with chargeable overseas earnings for a year when the remittance basis applies and the employee is ordinarily UK resident; and
- section 26 deals with foreign earnings for a year when the remittance basis applies and the employee is not ordinarily UK resident.
- Section 27 continues to apply as before.
Finance Act 2013 made further changes from 6 April 2013, removing the concept of “ordinary residence” from the Taxes Acts. For ITEPA03/S22, the condition of the employee being ordinarily resident was replaced by the condition of not meeting “the requirement of section 26A” and for ITEPA03/S26, the condition of the employee being not ordinarily resident was replaced by the condition of meeting “the requirement of section 26A”. Guidance on this new test is in the Residence, Domicile and Remittance Basis Manual.
There are transitional arrangements regarding the ‘abolition’ of ordinary residence. An individual who was R/NOR at 5 April 2013 can still claim the remittance basis on the basis of being NOR for so long as she or he remains NOR (up to 2015-16).
The broad principle of taxation of the general earnings of UK resident employees who are either not domiciled in the UK or are not ordinarily UK resident (NOR) (from 6 April 2013: not domiciled and either meeting or not meeting “the requirement of section 26A”) continues to be that general earnings in respect of foreign duties for foreign employers (in the case of “non-domiciles”) and foreign duties in general (in the case of “R/NORs”) are charged to income tax only to the extent that they are remitted to the UK.
Specific employment income
The charges in Part 7 of ITEPA relating to employment-related securities and options are not directly governed by sections 15 to 27 of ITEPA. However, whether a particular Chapter of Part 7 applies depends on whether those sections apply to general earnings in the relevant year.
The rules are set out in ITEPA03/S421E for securities and in ITEPA03/S474 for securities options.
Up until 5 April 2008
- Chapter 2 (restricted securities)
- Chapter 3 (convertible securities)
- Chapter 4 (post-acquisition benefits)
- Chapter 5 (securities options)
of Part 7 ITEPA only applied if the earnings from an individual’s employment were general earnings to which sections 15 or 21 applied: that is; the individual was resident and ordinarily resident (R/OR) at the time of acquisition of the security or option.
- Chapter 3A (securities with artificially depressed market value);
- Chapter 3B (securities with artificially enhanced market value);
- Chapter 3C (securities acquired for less than market value); and
- Chapter 3D (securities disposed of for more than market value)
of Part 7 applied not only to employees who were R/OR at acquisition but to employees whose earnings from the employment were general earnings to which any of the charging provisions of Chapter 4 or 5 of Part 2 apply at acquisition. (There is no specific residence rule affecting the relief under Chapter 4A, as it disapplies the charges under Chapter 2, 3B and 4, which have their own residence rules.)
The wider application of Chapters 3A to 3D had some odd and erratic effects. The most commonly encountered of these was that employees who were resident but not ordinarily resident in the UK at the grant of a securities option could be charged to tax by virtue of Chapter 3C on a notional loan, based on the value of the securities at the time the option was exercised and on the “discharge” of that loan at the time the securities were sold. (See the guidance at ERSM70400 et seq.)