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HMRC internal manual

Employment Related Securities Manual

From
HM Revenue & Customs
Updated
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Securities with Artificially Enhanced Value

Dependent subsidiary pre-16 April 2003 - charge

There is charge under FA88/S79 where the company in which shares are held by the employee:

  • is a dependent subsidiary at the time the shares are acquired, or
  • becomes a dependent subsidiary while the employee still has a beneficial interest in the shares.

Dependent subsidiary at the time the shares are acquired (FA88/S79 (2))

If the company in which shares are acquired is a dependent subsidiary (see ERSM60300) at the time of the acquisition, a chargeable increase occurs if the value of the shares increases:

  • over a period of seven years from the date of acquisition, or
  • over the period of ownership if that is shorter.

Becomes a dependent subsidiary after acquisition of shares (FA88/S79 (3))

If the company in which shares are acquired becomes a dependent subsidiary some time after the shares are acquired, a chargeable increase occurs if the value of the shares increases:

  • over a period of seven years from the time the company becomes a dependent subsidiary, or
  • over the period of ownership, starting from the time the company becomes a dependent subsidiary or
  • over the period during which the company is a dependent subsidiary.

The charge crystallises at the end of the shortest of the periods.

Time and amount of charge

The charge to tax under Schedule E is made for the year of assessment, which includes the end of the period for which the chargeable increase is determined. The charge is on an amount equal to the increase in value of the shares over the period.

If the employee’s interest in the shares is less than a full beneficial interest the charge is on an appropriate amount of the increase in value, corresponding to the size of the interest.

Reductions in charge

An employee may acquire shares subject to the condition that at a later date, and if certain contingencies occur, he may be required to pay additional consideration for the acquisition of the shares. If this occurs, the amount of the charge arising under FA88/S79 is to be reduced by the amount of the additional consideration paid. For this reduction to apply it is important to note that the provision for the payment of additional consideration must have been one of the terms on which the acquisition was made.

Reduced sale price of shares:

Per FA88/S79 (6), an employee may acquire shares subject to the condition that if he wishes to dispose of them this may only be done by selling them at a particular price, perhaps to an employee trust or to a controlling shareholder. If the price at which they must be sold is less than the value of the shares at the time of the sale, there is a reduction in the charge to tax. The charge is to be equal to the difference between the consideration for the disposal and the value of the shares at the acquisition date. Again, it is important to note that the reduction only applies if the provision regarding the sale price was one of the terms on which the acquisition was made.

Exception from the charge

Per FA88/S79 (7), if the shares were not shares in a dependent subsidiary at the time they were acquired, a charge can only arise under FA88/S79 if, at some time during the period of seven years ending with the time the company becomes a dependent subsidiary, the person who acquires the shares has been a director or employee of one of the following companies:

  • The company that issued the shares.
  • The company as a director or employee of which he acquired the shares. This could be a different company from the one that issued the shares.
  • An associated company of either of the above.