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HMRC internal manual

Employment Related Securities Manual

Securities with Artificially Enhanced Value

Dependent subsidiary pre-16 April 2003 - introduction


The legislation was originally enacted in FA88/S79, which became part of Chapter 4 Part7 ITEPA 2003 as originally enacted. It applies up to 15 April 2003, but there are no transitional provisions for accumulated charges up to that date. Only if there is a chargeable event (at 7 year point or on sale) before 16 April 2003 will the old legislation apply. Thereafter Chapter 3B will tax artificial increases in the value of securities but only those arising on or after 16 April 2003.

Only directors and employees chargeable to tax under Case I of Schedule E in respect of the employment that gives rise to the acquisition of shares in the dependent subsidiary are within the scope of the dependent subsidiary provisions. For the purpose of FA88/S79 the terms ‘director’ and ‘employee’ include persons who are about to become directors and employees. References to employees should be read as including directors.

A person who is not an employee may be granted a right to acquire shares in a company because some other person (who may not be connected with him or her) is an employee of that or another company. He may then sell the right to acquire the shares or the interest in shares to the employee in question and the employee subsequently acquires shares in pursuance of the right. In these circumstances the acquisition by the employee is treated as being in pursuance of a right conferred on him by reason of the employment per FA88/S87 (4).

The provisions of FA88/S79 do not apply if the employee acquires the shares in a public offer but they do apply if the employee acquires the shares in pursuance of a special offer to employees made at the same time as an offer to the public.


The following definitions apply:

Shares are defined to include stock, and also securities as defined in ICTA88/S254 (1). It includes an interest in shares.

Connected person definition is that in ICTA88/S839.

Control has the same meaning as in ICTA88/S840.

Independent companies – companies which are not subsidiary companies.

Independent subsidiaries – subsidiary companies which are not dependent subsidiaries.

Dependent subsidiary – a subsidiary which does not qualify as an independent subsidiary company.

Group consists of a principal company and all its subsidiaries.

Subsidiary is a 51 per cent subsidiary.

Shares acquired by a connected person

Shares in a company may be acquired by a person who is not an employee, but who acquires the shares because he is connected with an employee or director of that or another company. If so, FA88/S79 may have effect as if the shares had been acquired by the director or employee. The shares, or an interest in the shares, are deemed to have been acquired by the employee or director, and any Income Tax charge which subsequently arises is made on the employee or director.

Whether shares are acquired by an employee, or by a person connected with an employee, they are not disposed of for the purposes of these provisions until they have been disposed of in a bargain at arms length to a person who is not connected with the person who acquired the shares. Any Income Tax charge which arises while the shares are held by a connected person is made on the employee, per FA88/S83 (2).

For instance, an employee may acquire shares and then give them to his daughter, or transfer his beneficial ownership to a trust. The employee will continue to have a potential liability to Income Tax in respect of those shares until the daughter or the trust has disposed of them in an arms-length bargain to someone unconnected with the employee. If an event occurs which would produce a charge under the dependent subsidiary provisions or under the post-acquisition charge provisions if the employee still held the shares, the charge can be made on the employee.

The employee may, however, be required in certain circumstances to sell the shares back to the company that issued them. If this requirement is part of the terms on which the shares were acquired, the sale back counts as an arms-length disposal to an unconnected person, per FA88/S83 (3).

Company reorganisation

The rollover provisions described in ERSM30500 under pre-16/4/03 restricted shares also apply to the dependent subsidiary legislation, so the new holding is identified with the old holding.