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HMRC internal manual

Employment Related Securities Manual

Post Acquisition Benefits from Securities

Benefits received before 16 April 2003: scope of provisions

FA88/S77 applies the special benefits provisions to acquisitions of shares made on or after 26 October 1987.

Acquisitions of shares made before 26 October 1987 are covered by the provisions of ICTA88/S138 (formerly FA72/S79).

Only directors and employees chargeable to tax under Case I of Schedule E in respect of the employment giving rise to the acquisition are within the scope of the provisions. The terms ‘director’ and ‘employee’ include persons who are about to become directors and employees. References to employees should be read as including directors.

The provisions do not apply if the employee acquires the shares in a public offer. They do apply if the employee acquired the shares in pursuance of a special offer to employees made at the same time as an offer to the public.

By reason of employment

The shares or an interest in shares in a company must have been acquired in pursuance of a right conferred on the employee or an opportunity offered to the employee by reason of his office as a director of, or his employment by, the employing company or any other company – FA88/S77 (1).

Per FA88/S87 (4), 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, 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. Eg. Mr A is granted a right to acquire shares in company A because of Mrs B’s employment with company B. Mr A sells that right to acquire the shares to Mrs B, who acquires shares in company A in pursuance of that right. The acquisition by Mrs B is treated as being in pursuance of a right conferred on her by reason of her employment.

Shares acquired by another person by reason of employee’s employment

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, the FA88/S80 charge has 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 that subsequently arises is made on the employee or director.

Shares and interest in shares

‘Shares’ include other company securities per ICTA88/S254 (1).

The charging provisions apply in the same way to the acquisition of an interest in shares as they apply to the acquisition of shares. The provisions regarding connected persons and the interaction with Capital Gains Tax also apply to interests in shares as they do to shares. Any charge to tax will be proportionate to the size of the interest.

References to an interest in shares include references to an interest in the proceeds of sale of part of the shares.

An option to acquire shares is not regarded as an interest in shares for the purpose of these provisions.

If a person’s interest in shares is increased or reduced, that is to be treated as the acquisition or disposal of a separate interest proportionate to the increase or reduction.

Where an interest in shares is increased, liability may arise under ICTA88/S19 (1) inrespect of the additional interest acquired, if the employee has not given full consideration for the acquisition of the additional interest.

Disposal of shares

Per FA88/S83 (2), 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 by a bargain at arm’s 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.

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 arm’s-length bargain to someone unconnected with the employee. If either the daughter or the trust receives a special benefit, the employee is charged to tax as if he had done so. If an event occurs which would produce a charge under these provisions if the employee still held the shares, the charge is made on the employee.

Connected person: definition

Per FA88/S87 (3), the definition of ‘connected person’ is that in ICTA88/S839.

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