Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Employment Related Securities Manual

From
HM Revenue & Customs
Updated
, see all updates

Securities with Artificially Enhanced Value

Dependent subsidiary pre-16 April 2003 - examples

The following examples illustrate the charges under FA88/S79.

Example 1: dependent subsidiary at time of acquisition of shares

On 1 January 1993 an employee acquires 500 shares in a company which is a dependent subsidiary company. Their cost (and their value) is £2 per share.

200 shares are sold on 1 June 1996 but the remainder are not sold until 31 March 2003.

The value of the shares on 1 June 1996 is £5 per share and on 31 December 1999 (7 years after acquisition) it is £10 per share.

There are two charges to tax under Schedule E

  • For 1996-97 on £1,000-£400 = £600, in respect of the 200 shares sold.
  • For 1999-2000 on £3,000-£600 = £2,400, in respect of the shares retained.

Once the seven-year period has passed there can be no further charge to Income Tax in respect of these shares.

Example 2: becomes dependent subsidiary after acquisition of shares

On 1 January 1993 an employee acquires 500 shares in an independent company at a cost of £2 per share.

On 1 April 1995 the company becomes a dependent subsidiary company.

On 1 June 1998 the employee sells 200 shares. The employee does not sell the remainder of the shares until the 31 March 2003.

The value of the shares at 1 April 1995 was £3 per share. At 1 June 1998 it was £5 per share, and at 31 March 2002 (7 years after the company became a dependent subsidiary) it was £4 per share.

There are two charges to tax under Schedule E:

  • For 1998-99 on £1,000-£600 = £400. This is in respect of the shares sold, and is on the difference between their value at the date of sale and their value at the date the company became a dependent subsidiary.
  • For 2001-02 on £1,200-£900 = £300. This is in respect of the shares retained, and is on the difference between their value 7 years after the company became a dependent subsidiary and their value at the time it became a dependent subsidiary.

Example 3: ceasing to be dependent subsidiary

On 1 January 1993 an employee acquires 500 shares in an independent company at a cost of £2 per share.

On 1 April 1995 the company becomes a dependent subsidiary company.

On 1 June 1998 the employee sells 200 shares.

On 1 September 2000 the company ceases to be a dependent subsidiary. The employee does not sell the remainder of the shares until 31 March 2003.

The value of the shares at 1 April 1995 was £3 per share. At 1 June 1998 it was £5 pershare and at 1 September 2000 it was £7 per share. (1 September 2000 is the start of a new accounting period, the company having changed its accounting date some time after 1 April 1995.)

There are two charges to tax under Schedule E

  • For 1998-99 on £1,000-£600 = £400. This is in respect of the shares sold, and is on the difference between their value at the date of sale and their value at the date the company became a dependent subsidiary.
  • For 2000-01 on £2,100-£900 = £1,200. This arises at the time the company ceases to be a dependent subsidiary, and is on the difference between the value of its shares at that time and their value at the time the company became a dependent subsidiary.

Examples 1, 2 & 3: Further charges

It is important to note, in respect of both Example 2 and Example 3, that further charges to Income Tax might occur in respect of these shares if or when the company becomes an independent company again. This is because the post-acquisition charge applies to shares which were acquired in an independent company at any time when that company is an independent company.

In Example 1, however, the shares on acquisition were shares in a dependent subsidiary company, and such shares can never be subject to the post-acquisition charge. They remain subject to the growth-in-value charge for the 7 years from acquisition even if the company becomes an independent company within that period.

Example 4 – transition from dependent subsidiary to Chapter 3B

On 1 January 1997 an employee acquires 500 shares in a company which is a dependent subsidiary company. Their cost (and their value) is £2 per share.

200 shares are sold on 1 June 2000 but the remainder are not sold until 31 March 2005.

The value of the shares on 1 June 2000 is £5 per share and on 31 December 2003 (7 years after acquisition) is £10 per share.

The increase in value of the shares is caused by a favourable contract with the parent company on a non-arm’s length basis. The value of the shares as at 16 April 2003 is £9, at 5 April 2004 £11 and at 31 March 2005 £13.

The first charge to tax under Schedule E is in the year of sale

  • For 2000-01 on £1,000 – £400 = £600, in respect of the 200 shares sold.

Under the old dependent subsidiary legislation there would have been a charge at the 7-year point on £2,400 (£3,000 – £600), but the legislation had been repealed by then.

However, as the increase in value is caused by a thing done otherwise than for genuine commercial purposes (the non-arms length transactions), Chapter 3B will apply to the shares, deemed to have been acquired at 16 April 2003. The charge for the first relevant period (16/4/03 – 5/4/04) will be:

  • For 2003-04 on IMV – MV = £3,300 - £3,000 = £300

The charge for the second and final relevant period (6/4/04 – 31/3/05) will be:

  • For 2004-05 on IMV – MV = £3,900 - £3,300 = £600