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Income Tax (Earnings and Pensions) Act 2003

Type Public General Act

Publication 2003-03-06

Last updated 2026-03-15

State In force

Department Statute Law Database

Source legislation.gov.uk

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No charge in respect of acquisition of employee’s interest in certain circumstances

426

(1) If a chargeable event occurs in relation to the employment-related securities, the taxable amount counts as employment income of the employee for the relevant tax year.

(2) For this purpose—

(a) “chargeable event” has the meaning given by section 427,

(b) “the taxable amount”is the amount determined under section 428, and

(3) Relief may be available under section 428A (relief for secondary Class 1 contributions met by employee) against an amount counting as employment income under this section.

(5) This section is subject to section 429 (case outside charge under this section).

Tax charge

Charge on interest in shares ceasing to be only conditional or on disposal

427

(1) This section applies for the purposes of section 426 (charge on occurrence of chargeable event).

(2) Any of the events mentioned in subsection (3) is a “chargeable event” in relation to the employment-related securities.

(3) The events are—

(a) the employment-related securities ceasing to be restricted securities, or a restricted interest in securities, in circumstances in which an associated person is beneficially entitled to the employment-related securities after the event,

(b) the variation of any restriction relating to the employment-related securities in such circumstances (without the employment-related securities ceasing to be restricted securities or a restricted interest in securities), and

(c) the disposal for consideration of the employment-related securities, or any interest in them, by an associated person otherwise than to another associated person (at a time when they are still restricted securities or a restricted interest in securities).

(4) For the purposes of this Chapter there is a variation of a restriction relating to the employment-related securities if any restriction in relation to them is removed or varied.

Amount of charge

428

(1) The taxable amount for the purposes of section 426 (charge on occurrence of chargeable event) is—

$UMV×(IUP-PCP-OP)-CE$

(2) UMV is what would be the market value of the employment-related securities immediately after the chargeable event but for any restrictions.

(3) IUP is—

$$IUMV-DAIUMV$where—IUMV is what would have been the market value of the employment-related securities at the time of the acquisition but for any restrictions, and DA is the total of any deductible amounts.$

(4) PCP is the aggregate of the result of the application of the formula—

$IUP-PCP-OP$

on each previous event (if any) occurring since the acquisition that was a chargeable event for the purposes of section 426 in relation to the employment-related securities (and so is nil if there has not been such a previous event).

(5) OP is—

$$UMV-AMVUMV$where AMV is the actual market value of the employment-related securities immediately after the chargeable event.$

(6) CE is any expenses incurred by the holder of the employment-related securities in connection with—

(a) the employment-related securities ceasing to be restricted securities or a restricted interest in securities,

(b) the variation of a restriction relating to the employment-related securities, or

together (if the chargeable event is one within section 427(3)(a) or (b) (lifting of restrictions and variation of restriction)) with any consideration given for the employment-related securities ceasing to be restricted securities or a restricted interest in securities or the variation of a restriction relating to the employment-related securities.

(6A) CE also includes any amount that has counted as employment income of the employee in respect of the employment under Chapter 2 of Part 7A in relation to the employment-related securities where the relevant step (within the meaning of that Part) was taken before the chargeable event occurred.

(7) For the purposes of this section each of the following is a “deductible amount”—

(a) the amount of any consideration given for the acquisition of the employment-related securities,

(b) any amount that constituted earnings from the employee’s employment under Chapter 1 of Part 3 (earnings) in respect of the acquisition of the employment-related securities (other than an amount of exempt income),

(ba) any amount treated as earnings from the employee's employment under section 226A (employee shareholder shares: amount treated as earnings) in respect of the acquisition of the employment-related securities (other than an amount of exempt income),

(bb) any amount that was charged to non-UK income tax in respect of the acquisition of the employment-related securities, but only so far as that amount exceeds any amount within paragraph (b) or (ba),

(c) any amount that counted as employment income in relation to the employment-related securities under Chapter 2 or 4 of this Part as originally enacted,

(d) if the employment-related securities were acquired on a conversion of other employment-related securities, any amount that counted as employment income of the employee under Chapter 3 of this Part (including that Chapter as originally enacted) (convertible securities) by reason of the conversion, and

(e) if the acquisition of the employment-related securities was pursuant to a securities option, any amount that counted as employment income of the employee under section 476 (or section 476 or 477 as originally enacted) (acquisition of securities pursuant to securities option) by reason of the acquisition.

(7A) In subsection (7)(b) and (ba) the references to an amount of exempt income, in a case in which the amount that constituted, or was treated as, earnings in respect of the acquisition was not an amount of general earnings to which any of the charging provisions of Chapters 4 and 5 of Part 2 applied, includes any amount that would have been an amount of exempt income if any of those charging provisions had applied.

(7B) In subsection (7)(bb) “non-UK income tax” means a tax chargeable on income under the law of a territory outside the United Kingdom that corresponds to United Kingdom income tax.

(7C) A tax is not outside the scope of subsection (7B) by reason only that it—

(a) is chargeable under the law of a province, state or other part of a country, or

(b) is levied by or on behalf of a municipality or other local body.

(8) If the employment-related securities are convertible securities, or an interest in convertible securities, their market value is to be determined for the purposes of this section as if they were not.

(9) Where the chargeable event is one within section 427(3)(c) (disposal) and CD is less than AMV, the taxable amount for the purposes of section 426 is the amount determined under subsection (1) multiplied by—

$$CDAMV$where— CD is the consideration given for the employment-related securities, and AMV is the actual market value of the employment-related securities immediately after the chargeable event.$

(10) But subsection (9) does not apply if something which affects the employment-related securities has been done (at or before the time of the chargeable event) as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions.

Supplementary provisions

Amount or value of consideration given for employee’s interest

429

(1) Section 426 (charge on occurrence of chargeable event) does not apply if—

(a) the employment-related securities are shares (or an interest in shares) in a company of a class,

(b) the provision by virtue of which the employment-related securities are restricted securities, or a restricted interest in securities, applies to all the company’s shares of the class,

(ba) subsection (1A) is satisfied,

(c) all the company’s shares of the class (other than the employment-related securities) are affected by an event similar to that which is a chargeable event in relation to the employment-related securities, and

(d) subsection (3) or (4) is satisfied.

(1A) This subsection is satisfied unless something which affects the employment-related securities has been done (at or before the time when section 426 would apply) as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions.

(2) For the purposes of subsection (1)(c) shares are affected by an event similar to that which is a chargeable event in relation to the employment-related securities—

(a) in the case of a chargeable event within section 427(3)(a) (lifting of restrictions), if the provision mentioned in subsection (1)(b) ceases to apply to them,

(b) in the case of a chargeable event within section 427(3)(b) (variation of restriction), if that provision is varied in relation to them in the same way as in relation to the employment-related securities, or

(3) This subsection is satisfied if, immediately before the event that would be a chargeable event, the company is employee-controlled by virtue of holdings of shares of the class.

(4) This subsection is satisfied if, immediately before that event, the majority of the company’s shares of the class are not employment-related securities.

(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount or value of consideration given for right to acquire shares

430

(1) The employer and the employee may elect that—

(a) on a chargeable event the taxable amount for the purposes of section 426 is to be determined by applying section 428(1) as if it did not include a reference to OP, and

(b) sections 426 to 429 are not to apply to the employment-related securities after that chargeable event.

(2) An election under this section—

(a) is to be made by agreement by the employer and the employee, and

(b) is irrevocable.

(3) Such an agreement—

(a) must be made in a form approved by the Commissioners for Her Majesty’s Revenue and Customs , and

(b) may not be made more than 14 days after the chargeable event.

(4) No election may be made under this section unless, at the time of the chargeable event, the earnings from the employment are (or would be if there were any) general earnings to which any of the charging provisions of Chapters 4 and 5 of Part 2 applies.

Application of this Chapter where employee dies

431

(1) The employer and the employee may elect in relation to employment-related securities which are restricted securities or a restricted interest in securities that—

(a) for the relevant tax purposes their market value at the time of the acquisition is to be calculated as if they were not, and

(b) sections 425 to 430 are not to apply to the employment-related securities.

(2) Or the employer and the employee may elect in relation to employment-related securities which are restricted securities or a restricted interest in securities that—

(a) for the relevant tax purposes their market value at the time of the acquisition is to be calculated, and

(b) sections 425 to 430 are to apply to the employment-related securities,

as if any specified restriction did not apply to the employment-related securities.

(3) For the purposes of subsections (1) and (2) “the relevant tax purposes” are—

(a) determining any amount that is to constitute earnings from the employment under Chapter 1 of Part 3 (earnings),

(aa) determining any amount that is to be treated as earnings from the employment where section 226A applies (employee shareholder shares: amount treated as earnings),

(b) determining the amount of any gain realised on the occurrence of an event that is a chargeable event by virtue of section 439(3)(a) (conversion),

(d) determining any amount that counts as employment income of the employee under Chapter 5 of this Part (securities acquired pursuant to securities option) , and

(e) determining any amount that counts as employment income of the employee in respect of the employment under Chapter 2 of Part 7A (employment income provided through third parties)

(4) An election under this section—

(a) is to be made by agreement by the employer and the employee, and

(b) is irrevocable.

(5) Such an agreement—

(a) must be made in a form approved by the Commissioners for Her Majesty’s Revenue and Customs and

(b) may not be made more than 14 days after the acquisition.

(6) No election may be made under this section unless, at the time of the acquisition, the earnings from the employment are (or would be if there were any) general earnings to which any of the charging provisions of Chapters 4 and 5 of Part 2 applies.

Duty to notify provision of conditional interests in shares

432

(1) In this Chapter—

“interest”, in relation to securities,

“securities”,

“securities option”, and

“shares”,

have the meaning indicated in section 420.

(2) In this Chapter “market value” has the meaning indicated in section 421(1).

(3) For the purposes of this Chapter sections 421(2) and 421A apply for determining the amount of the consideration given for anything and section 421I applies for determining the amount of the consideration given for the acquisition of employment-related securities.

(4) In this Chapter—

“the acquisition”,

“the employee” (except in section 429),

“the employer”,

“the employment”, and

“employment-related securities”,

have the meaning indicated in section 421B(8).

(5) In this Chapter “associated person” has the meaning indicated in section 421C.

(6) In this Chapter—

“associated company”, and

“employee-controlled”,

have the meaning indicated in section 421H.

(7) In this Chapter—

“restricted interest in securities”, and

“restricted securities”,

have the meaning indicated in sections 423 and 424.

(8) In this Chapter “restriction”, in relation to securities or an interest in securities, means provision relating to the securities or interest which is made by any contract, agreement, arrangement or condition and to which any of subsections (2) to (4) of section 423 applies.

(9) In this Chapter “variation”, in relation to a restriction, has the meaning indicated in section 427(4).

(10) In this Chapter “convertible securities” has the same meaning as in Chapter 3 of this Part (see section 436).

Duty to notify events resulting in charges under section 427

433

(1) Subsection (2) applies if—

(a) a person has an interest in shares which is only conditional,

(b) either—

(i) the shares cease to be shares in which that person’s interest is only conditional,

(ii) the shares are disposed of, or

(iii) that person dies, and

(c) by virtue of that event an amount counts as employment income under section 427 (charge on interest in shares ceasing to be only conditional or on disposal).

(2) Each of the following persons—

(a) the person who provided the interest in shares, and

(b) the employer company,

must provide the Inland Revenue with particulars in writing of the interest and the event.

(3) The particulars must be provided before 7th July in the tax year following that in which the event occurs.

Minor definitions

434

(1) In this Chapter—

“director”—in the case of a company whose affairs are managed by a board of directors or similar body, means a member of that board or similar body,in the case of a company whose affairs are managed by a single director or similar person, means that director or person,in the case of a company whose affairs are managed by its members, means a member,and includes any person who is to be or has been a director;

“employee” includes—in relation to a company, a person taking part in the management of the affairs of the company who is not a director, anda person who is to be or has been an employee;

“market value”, in relation to an interest in shares, means the amount that might reasonably be expected to be obtained from a sale of the interest in the open market;

“shares” (except in section 423 in the expression “convertible shares”) includes—stock,securities issued by a company, andany other interest of a member of a company;

“terms” on which a person is entitled to an interest in shares means terms imposed by contract or arrangement or in any other way.

(2) In this Chapter—

“the employee”,

“the employee’s interest”,

“the employer company”, and

“the shares”,

have the meaning indicated in section 422(1) and (2).

Chapter 3 — Convertible securities

Introduction

Application of this Chapter

435

This Chapter applies to employment-related securities if they are—

(a) convertible securities, or

(b) an interest in convertible securities,

at the time of the acquisition.

Shares acquired “as a director or employee”

436

For the purposes of this Chapter securities are convertible securities if—

(a) they confer on the holder an entitlement (whether immediate or deferred and whether conditional or unconditional) to convert them into securities of a different description,

(b) a contract, agreement, arrangement or condition authorises or requires the grant of such an entitlement to the holder if certain circumstances arise, or do not arise, or

(c) a contract, agreement, arrangement or condition makes provision for the conversion of the securities (otherwise than by the holder) into securities of a different description.

Cases where this Chapter does not apply

437

(1) For the purposes of—

(a) any liability to tax under Chapter 1 of Part 3 (earnings), Chapter 10 of Part 3 (taxable benefits: residual liability to charge) , section 226A (employee shareholder shares: amount treated as earnings) or Chapter 5 of this Part (acquisition of securities pursuant to securities option) or Chapter 2 of Part 7A (employment income provided through third parties), and

(b) the operation of Chapter 3C of this Part (acquisition of securities for less than market value),

the market value of the employment-related securities is to be determined as if they were not convertible securities or an interest in convertible securities

(2) Subsection (1) does not apply if the main purpose (or one of the main purposes) of the arrangements under which the right or opportunity to acquire the employment-related securities is made available is the avoidance of tax or national insurance contributions unless the market value of the employment-related securities determined under subsection (1) would be greater than that determined under subsection (3).

(3) Where subsection (1) does not apply by virtue of subsection (2) the market value of the employment-related securities is to be determined—

(a) where the securities which are (or an interest in which is) the employment-related securities fall within paragraph (a) of section 436 and the entitlement to convert is not both immediate and unconditional, as if it were,

(b) where they fall within paragraph (b) of that section, as if the circumstances are such that an entitlement to convert arises immediately, and

and in each case is to be determined as if they were immediately and fully convertible.

(4) In subsection (3) “immediately and fully convertible” means convertible immediately after the acquisition of the employment-related securities so as to obtain the maximum gain that would be possible on a conversion at that time (assuming, where the securities into which the securities may be converted were not in existence at that time and it is appropriate to do so, that they were) without giving any consideration for the conversion or incurring any expenses in connection with it.

Tax charge

Charge on conversion of shares

438

(1) If a chargeable event occurs in relation to the employment-related securities, the taxable amount counts as employment income of the employee for the relevant tax year.

(2) For this purpose—

(a) “chargeable event” has the meaning given by section 439,

(b) “the taxable amount”is the amount determined under section 440, and

(3) Relief may be available under section 442A (relief for secondary Class 1 contributions met by employee) against an amount counting as employment income under this section.

(5) This section is subject to section 443 (case outside charge under this section).

Amount of charge

439

(1) This section applies for the purposes of section 438 (charge on occurrence of chargeable event).

(2) Any of the events mentioned in subsection (3) is a “chargeable event” in relation to the employment-related securities.

(3) The events are—

(a) the conversion of the employment-related securities (or the securities in which they are an interest) into securities of a different description in circumstances in which an associated person is beneficially entitled to the securities into which the employment-related securities are converted,

(b) the disposal for consideration of the employment-related securities, or any interest in them, by an associated person otherwise than to another associated person (at a time when they are still convertible securities or an interest in convertible securities),

(c) the release for consideration of the entitlement to convert the employment-related securities (or the securities in which they are an interest) into securities of a different description, and

(d) the receipt by an associated person of a benefit in money or money’s worth in connection with the entitlement to convert (other than securities acquired on the conversion of the employment-related securities or consideration such as is mentioned in paragraph (b) or (c)).

(4) A benefit received on account of any disability (within the meaning of the Equality Act 2010 in England and Wales and Scotland, or the Disability Discrimination Act 1995) of the employee is to be disregarded for the purposes of subsection (3)(d).

Case outside charge under section 438: conversion of entire class

440

(1) The taxable amount for the purposes of section 438 (charge on occurrence of chargeable event) is—

$AG-CE$

(2) AG is the amount of any gain realised on the occurrence of the chargeable event.

(3) CE is the amount of any consideration given for the entitlement to convert the employment-related securities or the securities in which they are an interest together with the amount of any expenses incurred by the holder of the employment-related securities in connection with the conversion, disposal, release or receipt.

(3A) If (because of subsection (2) of section 437) subsection (1) of that section did not apply in relation to the employment-related securities, the taxable amount is to be reduced by the amount by which—

(a) the market value of the employment-related securities for the purposes specified in that subsection, exceeded

(b) what it would have been had that subsection applied,

(less the aggregate of any amount by which the taxable amount on any previous chargeable event relating to the employment-related securities has been reduced under this subsection).

(4) Section 441 explains what is the amount of any gain realised on the occurrence of a chargeable event.

(5) Section 442 explains whether consideration is given for the entitlement to convert the employment-related securities or the securities in which they are an interest and, if it is, what is its amount.

Case outside charge under section 438: acquisition of conditional interest

441

(1) This section applies for the purposes of section 440 (amount of charge on occurrence of chargeable event).

(2) The amount of the gain realised on the occurrence of an event that is a chargeable event by virtue of section 439(3)(a) (conversion) is—

$CMVCS-(CMVERS+CC)$

(3) The amount of the gain realised on the occurrence of an event that is a chargeable event by virtue of section 439(3)(b) (disposal) is—

$DC-CMVERS$

(4) The amount of the gain realised on the occurrence of an event that is a chargeable event by virtue of section 439(3)(c) (release of entitlement to convert) is the amount of the consideration received by an associated person in respect of the release.

(5) The amount of the gain realised on the occurrence of an event that is a chargeable event by virtue of section 439(3)(d) (receipt of benefit) is the amount or market value of the benefit.

(6) CMVCS—

(a) if the employment-related securities are securities, is the market value at the time of the chargeable event of the securities into which they are converted (determined, where those securities are themselves convertible securities, as if they were not), or

(b) if the employment-related securities are an interest in securities, is the same proportion of that market value as the market value of the interest in the securities in which the employment-related securities are an interest bears to the market value of those securities.

(7) CMVERS is the market value of the employment-related securities at the time of the chargeable event determined as if they were not convertible securities or an interest in convertible securities.

(8) CC is the amount of any consideration given for the conversion of the employment-related securities.

(9) DC is the amount of the consideration given on the disposal.

(10) Subsection (11) applies for the purposes of subsection (2) or (3) if—

(a) prior to the acquisition, the employment-related securities were the subject of a relevant step within the meaning of Part 7A by reason of which Chapter 2 of that Part applied in respect of the employment, and

(b) the amount mentioned in subsection (11)(a) is higher than the amount mentioned in subsection (11)(b).

(11) The amount of the gain realised is reduced (but not below nil) by the amount equal to—

(a) the amount that counted as employment income of the employee in respect of the employment under Chapter 2 of Part 7A, less

(b) the market value of the employment-related securities when the relevant step was taken determined as if they were not convertible securities or an interest in convertible securities.

Supplementary provisions

Amount or value of consideration given for shares or conversion

442

(1) This section applies for the purposes of section 440 (amount of charge on occurrence of chargeable event).

(2) Consideration is to be regarded as given for the entitlement to convert the employment-related securities (or the securities in which they are an interest) if (and only if) ACS exceeds NCMV.

(3) The amount of the consideration to be regarded as so given is the amount of the excess.

(4) ACS is the amount of the consideration given for the acquisition of the employment-related securities.

(5) NCMV is the market value of the employment-related securities at the time of the acquisition, determined as if they were not convertible securities or an interest in convertible securities.

Amount or value of consideration given for right to acquire shares

443

(1) Section 438 (charge on occurrence of chargeable event) does not apply if—

(a) the employment-related securities are shares (or an interest in shares) in a company of a class,

(b) all the company’s shares of the class are convertible securities,

(ba) subsection (1A) is satisfied,

(c) all the company’s shares of the class (other than the employment-related securities) are affected by an event similar to that which is a chargeable event in relation to the employment-related securities, and

(d) subsection (3) or (4) is satisfied.

(1A) This subsection is satisfied unless something which affects the employment-related securities has been done (at or before the time when section 438 would apply) as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions.

(2) For the purposes of subsection (1)(c) shares are affected by an event similar to that which is a chargeable event in relation to the employment-related securities—

(a) in the case of a chargeable event within section 439(3)(a) (conversion), if they are converted into securities of a different description,

(b) in the case of a chargeable event within section 439(3)(b) (disposal), if they are disposed of,

(c) in the case of a chargeable event within section 439(3)(c) (release of entitlement to convert), if the entitlement to convert them into securities of a different description is released, or

(d) in the case of a chargeable event within section 439(3)(d) (receipt of benefit), if a similar benefit is received in respect of the entitlement to convert them.

(3) This subsection is satisfied if, immediately before the event that would be a chargeable event, the company is employee-controlled by virtue of holdings of shares of the class.

(4) This subsection is satisfied if, immediately before that event, the majority of the company’s shares of the class are not employment-related securities.

(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conversion in consequence of employee’s death

444

(1) In this Chapter—

“interest”, in relation to securities,

“securities”, and

“shares”,

have the meaning indicated in section 420.

(2) In this Chapter “market value” has the meaning indicated in section 421(1).

(3) For the purposes of this Chapter sections 421(2) and 421A apply for determining the amount of the consideration given for anything and section 421I applies for determining the amount of the consideration given for the acquisition of employment-related securities.

(4) In this Chapter—

“the acquisition”,

“the employee” (except in section 443), and

“employment-related securities”,

have the meaning indicated in section 421B(8).

(5) In this Chapter “associated person” has the meaning indicated in section 421C.

(6) In this Chapter—

“associated company”, and

“employee-controlled”,

have the meaning indicated in section 421H.

(7) In this Chapter “convertible securities” has the meaning indicated in section 436.

Duty to notify conversions of shares

445

(1) Subsection (2) applies if—

(a) a person has provided an individual with convertible shares in a company, or an interest in such shares,

(b) those shares are subsequently converted into shares of a different class, and

(c) the circumstances are such that the conversion results or may result in an amount counting as employment income of that individual under section 438 (charge on conversion of shares).

(2) Each of the following persons—

(a) the person who provided the shares or interest, and

(b) the employer company,

must provide the Inland Revenue with particulars in writing of the shares and their conversion.

(3) The particulars must be provided before 7th July in the tax year following that in which the conversion takes place.

Minor definitions

446

(1) In this Chapter—

“director”—in the case of a company whose affairs are managed by a board of directors or similar body, means a member of that board or similar body,in the case of a company whose affairs are managed by a single director or similar person, means that director or person,in the case of a company whose affairs are managed by its members, means a member,and includes any person who is to be or has been a director;

“employee” includes—in relation to a company, a person taking part in the management of the affairs of the company who is not a director, anda person who is to be or has been an employee;

“shares” (except in section 436 in the expression “an interest in shares which is only conditional”) includes stock and any other interest of a member of a company;

“terms” on which a person holds shares or an interest in shares means terms imposed by contract or arrangement or in any other way.

(2) In this Chapter—

“the employee”,

“the employer company”, and

“the shares”,

have the meaning indicated in section 435(1) and (4).

Chapter 4 — Post-acquisition benefits from securities

Introduction

Application of this Chapter

447

(1) This Chapter applies if an associated person receives a benefit in connection with employment-related securities .

(2) The taxable amount determined under section 448 counts as employment income of the employee for the relevant tax year.

(3) The “relevant tax year” is the tax year in which the benefit is received.

(4) If the benefit is otherwise chargeable to income tax this section does not apply unless something has been done which affects the employment-related securities as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions.

(5) This section is subject to section 449 (case outside this Chapter).

Cases where this Chapter does not apply

448

The taxable amount for the purposes of section 447 (charge on other chargeable benefits) is the amount or market value of the benefit.

Tax charge where restrictions or rights varied

Charge on occurrence of chargeable event

449

(1) This Chapter does not apply if—

(a) the employment-related securities are shares (or an interest in shares) in a company of a class,

(b) a similar benefit is received by the owners of all the company’s shares of the class,

(ba) subsection (1A) is satisfied, and

(1A) This subsection is satisfied unless something which affects the employment-related securities has been done as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions.

(2) This subsection is satisfied if, immediately before the receipt of the benefit, the company is employee-controlled by virtue of holdings of shares of the class.

(3) This subsection is satisfied if, immediately before the receipt of the benefit, the majority of the company’s shares of the class are not employment-related securities.

(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chargeable events

450

(1) In this Chapter—

“interest”, in relation to shares, and

“shares”,

have the meaning indicated in section 420(8).

(2) In this Chapter “market value” has the meaning indicated in section 421(1).

(3) In this Chapter—

“the employee” (except in section 449), and

“employment-related securities”,

have the meaning indicated in section 421B(8).

(4) In this Chapter “associated person” has the meaning indicated in section 421C.

(5) In this Chapter—

“associated company”, and

“employee-controlled”,

have the meaning indicated in section 421H.

Amount of charge

451

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cases outside charge under section 449

452

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tax charge on increase in value of shares of dependent subsidiaries

Charge on increase in value of shares of dependent subsidiary

453

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chargeable increases

454

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount of charge

455

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cases outside charge under section 453

456

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tax charge on other benefits from shares

Charge on other chargeable benefits from shares

457

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chargeable benefits

458

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount of charge

459

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cases outside charge under section 457

460

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supplementary provisions

461

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Company reorganisations etc.

462

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Disposals of shares to connected persons etc. ignored

463

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Application to interests in shares

464

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Duty to notify acquisitions of shares or interests in shares

465

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Duty to notify chargeable events and chargeable benefits

466

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interpretation

Meaning of “dependent subsidiary”

467

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of “employee-controlled”

468

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shares “held by outside shareholders”

469

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Minor definitions

470

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 5 — Securities options

Introduction

471

(1) This Chapter applies to a securities option acquired by a person where the right or opportunity to acquire the securities option is available by reason of an employment of that person or any other person.

(2) For the purposes of subsection (1) “employment” includes a former or prospective employment.

(3) A right or opportunity to acquire a securities option made available by a person’s employer, or a person connected with a person’s employer, is to be regarded for the purposes of subsection (1) as available by reason of an employment of that person unless—

(a) the person by whom the right or opportunity is made available is an individual, and

(b) the right or opportunity is made available in the normal course of the domestic, family or personal relationships of that person.

(4) A right or opportunity to acquire a securities option available by reason of holding employment-related securities is to be regarded for the purposes of subsection (1) as available by reason of the same employment as that by reason of which the right or opportunity to acquire the employment-related securities was available.

(5) In this Chapter—

“the acquisition”, in relation to an employment-related securities option, means the acquisition of the employment-related securities option pursuant to the right or opportunity available by reason of the employment,

“the employment” means the employment by reason of which the right or opportunity to acquire the employment-related securities option is available (“the employee” and “the employer” being construed accordingly), and

“employment-related securities option” means a securities option to which this Chapter applies.

472

(1) For the purposes of this Chapter the following are “associated persons” in relation to an employment-related securities option—

(a) the person who acquired the employment-related securities option on the acquisition,

(b) (if different) the employee, and

(2) A person is a relevant linked person if—

(a) that person (on the one hand), and

(b) either the person who acquired the employment-related securities option on the acquisition or the employee (on the other),

are or have been connected or (without being or having been connected) are or have been members of the same household.

(3) But a company which would otherwise be a relevant linked person is not if it is—

(a) the employer,

(b) the person from whom the employment-related securities option was acquired, or

473

(1) The starting-point is that section 475 contains an exemption from the liability to tax that might otherwise arise under—

(a) Chapter 1 of Part 3 (earnings), or

(b) Chapter 10 of that Part (taxable benefits: residual liability to charge),

when an employment-related securities option is acquired.

(2) Liability to tax may arise, when securities are acquired pursuant to the employment-related securities option, under—

(a) section 446B (charge on acquisition where market value of securities or interest artificially depressed),

(b) Chapter 3C of this Part (acquisition of securities for less than market value), or

(3) Liability to tax may also arise by virtue of section 476 when—

(a) the employment-related securities option is assigned or released, or

(b) a benefit is received in connection with the employment-related securities option.

(4) There are special rules relating to share options acquired under—

(a) Schedule 3 SAYE option schemes (see Chapter 7 of this Part),

(b) Schedule 4 CSOP schemes (see Chapter 8 of this Part), or

No charge in respect of receipt of shorter-term option

474

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Value of longer-term option for purposes of liability to tax in respect of receipt

475

(1) No liability to income tax arises in respect of the acquisition of an employment-related securities option.

(2) Subsection (1) is subject to section 526 (... CSOP schemes: charge where share option granted at a discount).

Charge on exercise, assignment or release of option by employee

476

(1) If a chargeable event occurs in relation to an employment-related securities option, the taxable amount counts as employment income of the employee for the relevant tax year.

(2) For this purpose—

(a) “chargeable event” has the meaning given by section 477,

(b) “the taxable amount”is the amount determined under section 478, and

(3) Relief under section 481 or 482 (relief for secondary Class 1 contributions or special contribution met by employee) may be available against an amount counting as employment income under this section.

(5) If the employee has been divested of the employment-related securities option by operation of law—

(a) income tax is charged on the amount determined under section 478, and

(b) the person liable for any tax so charged is the relevant person in relation to the chargeable event (see section 477(7)).

(5A) An amount charged under subsection (5)(a) is treated for income tax purposes as an amount of income.

(6) This section is subject to—

section 519 (... SAYE option schemes: no charge in respect of exercise of share option by employee),

section 524 (... CSOP schemes: no charge in respect of exercise of share option by employee), and

section 530 (enterprise management incentives: no charge on exercise by employee of option to acquire shares at market value).

Charge on employee where option exercised, assigned or released by another person

477

(1) This section applies for the purposes of section 476 (charge on occurrence of chargeable event).

(2) Any of the events mentioned in subsection (3) is a “chargeable event” in relation to the employment-related securities option unless it occurs on or after the death of the employee.

(3) The events are—

(a) the acquisition of securities pursuant to the employment-related securities option by an associated person,

(b) the assignment for consideration of the employment-related securities option by an associated person otherwise than to another associated person or the release for consideration of the employment-related securities option by an associated person, or

(c) the receipt by an associated person of a benefit in connection with the employment-related securities option (other than one within paragraph (a) or (b)).

(4) For the purposes of subsection (3)(a) securities are acquired at the time when a beneficial interest is acquired (and not, if different, the time when the securities are conveyed or transferred).

(5) A benefit received on account of any disability (within the meaning of the Equality Act 2010 in England and Wales and Scotland, or the Disability Discrimination Act 1995) of the employee is to be disregarded for the purposes of subsection (3)(c).

(6) A benefit in money or money’s worth received in consideration for or otherwise in connection with—

(a) failing or undertaking not to acquire securities pursuant to the employment-related securities option, or

(b) granting or undertaking to grant to another person a right to acquire securities which are subject to the employment-related securities option or any interest in them,

is to be regarded for the purposes of subsection (3)(c) as received in connection with the employment-related securities option.

(7) For the purposes of section 476(5) (charge to income tax) the relevant person in relation to a chargeable event is—

(a) in the case of an event that is a chargeable event by virtue of subsection (3)(a), the person by whom the securities are acquired, and

(b) in the case of an event that is a chargeable event by virtue of subsection (3)(b) or (c), the person by whom the consideration or benefit is received.

Amount of charges

478

(1) The taxable amount for the purposes of section 476 (charge on occurrence of chargeable event) is—

$$AG-DA$where—AG is the amount of any gain realised on the occurrence of the chargeable event, and DA is the total of any deductible amounts.$

(2) Section 479 explains what is the amount of any gain realised on the occurrence of a chargeable event.

(3) Section 480 specifies what are deductible amounts.

Amount of gain realised by exercising option

479

(1) This section applies for the purposes of section 478 (amount of charge on occurrence of chargeable event).

(2) The amount of the gain realised on the occurrence of an event that is a chargeable event by virtue of section 477(3)(a) (acquisition of securities) is (subject to subsection (4))—

$MV-C$

(3) In subsection (2)—

MV is the market value of the securities that are acquired at the time when they are acquired, and

C is the amount of any consideration given for the securities that are acquired.

(3A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) But the amount of the gain realised on the occurrence of an event that is a chargeable event by virtue of section 477(3)(a) (acquisition of securities) is calculated—

(a) if section 531 (enterprise management incentives: limitation of charge on exercise of option to acquire shares below market value) applies, in accordance with that section, and

(b) if section 532 (enterprise management incentives: modified tax consequences following disqualifying events) applies, in accordance with that section.

(5) The amount of the gain realised on the occurrence of an event that is a chargeable event by virtue of section 477(3)(b) (assignment or release of option) is the amount of the consideration given for the assignment or release.

(6) The amount of the gain realised on the occurrence of an event that is a chargeable event by virtue of section 477(3)(c) (receipt of benefit in connection with option) is the amount or market value of the benefit.

(7) But if—

(a) the consideration mentioned in subsection (5), or

(b) the benefit mentioned in subsection (6),

consists (in whole or in part) in the provision of securities or an interest in securities the market value of which has been reduced by at least 10% as a result of things done otherwise than for genuine commercial purposes within the period of 7 years ending with the receipt of the consideration or benefit, its market value is to be taken to be what it would be but for the reduction.

(8) The following are among the things that are, for the purposes of subsection (7), done otherwise than for genuine commercial purposes—

(a) anything done as part of a scheme or arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax or national insurance contributions, and

(b) any transaction between companies which are members of the same group on terms which are not such as might be expected to be agreed between persons acting at arm’s length (other than a payment for group relief).

(9) In subsection (8)(b)—

(a) “group” means a company and its 51% subsidiaries, and

(b) “group relief” has the same meaning as in section 183(1) of CTA 2010.

Amount of gain realised by assigning or releasing option

480

(1) This section applies for the purposes of section 478 (amount of charge on occurrence of chargeable event).

(2) The amount of—

(a) any consideration given for the acquisition of the employment-related securities option, and

(b) the amount of any expenses incurred in connection with the acquisition of securities, assignment, release or receipt which constitutes the chargeable event,

is a deductible amount.

(3) Where in consequence of—

(a) the acquisition of the employment-related securities option,

(b) the acquisition of securities pursuant to the employment-related securities option, or

(c) a transaction of which the acquisition of the employment-related securities option or the acquisition of securities pursuant to the employment-related securities option forms part,

there is a reduction in the market value of any employment-related securities to which an associated person is beneficially entitled, the amount of the reduction is to be treated for the purposes of subsection (2) as consideration (or additional consideration) given for the acquisition of the employment-related securities option.

(4) If an amount counts as employment income of the employee under section 526 (... CSOP schemes: charge where option granted at a discount) in respect of the employment-related securities option, so much of that amount as is attributable to the shares in question is a deductible amount.

(5) The following are also deductible amounts—

(a) any amount that constituted earnings from the employment under Chapter 1 of Part 3 (earnings) in respect of the acquisition of the employment-related securities option (other than an amount of exempt income),

(b) any amount that was treated as earnings from the employment under Chapter 10 of that Part (taxable benefits: residual liability to charge) in respect of the acquisition of the employment-related securities option, ...

(c) the amount of any gain by a previous holder on an assignment of the employment-related securities option which would have been a deductible cost by virtue of subsection (2)(c) of section 479 (as originally enacted) on an exercise of the option at a time when that section was in force, and

(d) any amount that has counted as employment income of the employee in respect of the employment under Chapter 2 of Part 7A in relation to the employment-related securities option or to any sum of money or asset held solely for the purposes of the option.

(5A) In subsection (5)(a) the reference to an amount of exempt income, in a case in which the amount that constituted earnings in respect of the acquisition was not an amount of general earnings to which any of the charging provisions of Chapters 4 and 5 of Part 2 applied, includes any amount that would have been an amount of exempt income if any of those charging provisions had applied.

(6) If there has been a previous chargeable event in relation to the employment-related securities option (or if section 476 or 477 as originally enacted applied to the option by virtue of an earlier event), so much of any deductible amount as was deducted in calculating the taxable amount on the occasion of that event is to be regarded as not being a deductible amount.

(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deductible amount in respect of secondary Class 1 contributions met by employee

481

(1) Relief is available under this section against an amount counting as employment income under section 476 if —

(a) an agreement having effect under paragraph 3A of Schedule 1 to the Contributions and Benefits Act has been entered into allowing the secondary contributor to recover from the employee the whole or part of any secondary Class 1 contributions in respect of the gain, or

(b) an election having effect under paragraph 3B of Schedule 1 to that Act is in force which has the effect of transferring to the employee the whole or part of the liability to pay secondary Class 1 contributions in respect of the gain.

(2) The amount of the relief is the total of —

(a) any amount that under the agreement referred to in subsection (1)(a) is recovered in respect of the gain by the secondary contributor before 5th June in the tax year following that in which the gain is realised, and

(b) the amount of any liability in respect of the gain that, by virtue of the election referred to in subsection (1)(b), has become the employee’s liability.

(3) If notice of withdrawal of approval of the election is given, the amount of any liability in respect of the gain for the purposes of subsection (2)(b) is limited to the amount of the liability met before 5th June in the tax year following that in which the gain is realised.

(4) Subsection (1) does not apply in respect of a liability to pay Class 1 contributions which is prevented from arising by virtue of section 2(1)(a) of the Social Security Contributions (Share Options) Act 2001 (liability to pay Class 1 contributions in respect of gains replaced by liability to pay special contribution).

(4A) Relief under this section is given by way of deduction from the amount otherwise counting as employment income.

(4B) Relief under this section does not affect the amount to be taken into account—

(a) as employment income in determining contributions payable under the Contributions and Benefits Act, or

(b) as relevant employment income for the purposes of paragraph 3A or 3B of Schedule 1 to that Act.

(5) In this section—

“approval”, in relation to an election, means approval by the Commissioners for Her Majesty’s Revenue and Customs under paragraph 3B of Schedule 1 to the Contributions and Benefits Act, and

“secondary contributor” has the same meaning as in that Act (see section 7).

Deductible amount in respect of special contribution met by employee

482

(1) Relief is available under this section against an amount counting as employment income under section 476 if conditions A to D are met.

(2) Condition A is that a notice in respect the employment-related securities option was given to the Commissioners for Her Majesty’s Revenue and Customs in accordance with section 1 of the Social Security Contributions (Share Options) Act 2001 before 11th August 2001.

(3) Condition B is that the person, or one of the persons, who gave that notice is a person who (apart from that Act) was liable, or would have become liable, by virtue of an election under paragraph 3B of Schedule 1 to the Contributions and Benefits Act, to pay secondary Class 1 contributions in respect of an event which is a chargeable event for the purposes of section 476.

(4) Condition C is that that person became liable to pay a special contribution under section 2 of the Social Security Contributions (Share Options) Act 2001 in respect of the employment-related securities option.

(5) Condition D is that that person met that liability before 11th August 2001 or before the end of such further period as the Commissioners for Her Majesty’s Revenue and Customs directed under section 2(5) of that Act.

(6) The amount of the relief is the amount of the liability referred to in subsection (4).

(7) Relief under this section is given by way of deduction from the amount otherwise counting as employment income.

Supplementary provisions

Extended meaning of “assign” and “release”

483

(1) This section applies if—

(a) the employment-related securities option (the “old option”) is assigned or released, and

(b) the whole or part of the consideration for the assignment or release consists of or includes another securities option (the “new option”).

(2) For the purposes of section 479(5) (amount of gain realised by assigning or releasing option) the new option is not to be treated as consideration given for the assignment or release of the old option.

(3) This Chapter applies to the new option as it applies to the old option.

(4) For the purposes of section 480(2) (consideration for acquisition of option) the amount of the consideration given for the acquisition of the new option is to be treated as being the sum of—

(a) the amount by which the amount of the consideration given for the acquisition of the old option exceeds the amount of any consideration given for the assignment or release of the old option, apart from the new option, and

(b) any valuable consideration given for the acquisition of the new option, apart from the old option.

(5) Two or more transactions are to be treated for the purposes of subsection (1) as a single transaction by which one option is assigned for a consideration which consists of or includes another option if—

(a) the transactions result in—

(i) a person ceasing to hold an option, and

(ii) that person or a connected person coming to hold another option, and

(b) one or more of the transactions is effected under arrangements to which two or more persons holding options, in respect of which there may be liability to tax under this Chapter, are parties.

(6) Subsection (5) applies regardless of the order in which the assignments and the acquisition occur.

484

(1) In this Chapter—

“securities”, and

“securities option”,

have the meaning indicated in section 420.

(2) In this Chapter “market value” has the meaning indicated in section 421(1).

(3) For the purposes of this Chapter sections 421(2) and 421A apply for determining the amount of consideration given for anything.

(4) In this Chapter “employment-related securities” has the same meaning as in Chapter 1 of this Part (see section 421B(8)).

(5) In this Chapter—

“the acquisition”,

“the employee”,

“the employer”,

“the employment”, and

“employment-related securities option”,

have the meaning indicated in section 471(5).

(6) In this Chapter “associated person” has the meaning indicated in section 472.

(7) In this Chapter—

“secondary Class 1 contributions” has the same meaning as in the Contributions and Benefits Act (see section 1 of that Act), ...

485

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

486

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Minor definitions

487

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Introduction

488

(1) This Chapter provides—

(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) for exemptions from income tax in connection with shares obtained under share incentive plans (“SIPs”) which are Schedule 2 SIPs,

(d) for the making of PAYE deductions in connection with such amounts.

(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) The provisions of—

(a) this and the following sections of this Chapter,

(b) Schedule 2, and

together constitute “the SIP code”.

(4) In the SIP code—

“PAYE deduction” means a deduction required by PAYE regulations;

“Schedule 2 SIP” is to be read in accordance with paragraph 1 and Part 10 of Schedule 2;

a “share incentive plan” (or “SIP” for short) means a plan established by a company providing—for shares to be appropriated to employees without payment (“free shares”), orfor shares to be acquired on behalf of employees out of sums deducted from their salary (“partnership shares”).

(5) Other expressions used in the SIP code and contained in the index at the end of Schedule 2 have the meaning indicated by the index.

Scope of tax advantages

Operation of tax advantages in connection with approved SIP

489

(1) Sections 490 to 499 apply for income tax purposes in connection with shares awarded under a Schedule 2 SIP.

(2) But those sections do not apply to an individual if, at the time of the award of shares in question, the earnings from the eligible employment are not (or would not be if there were any) general earnings to which any of the charging provisions of Chapter 4 or 5 of Part 2 apply.

(3) “The eligible employment” means the employment which results in the individual meeting the employment requirement in relation to the plan.

(4) And those sections do not apply if the main purpose (or one of the main purposes) of the arrangements under which the shares in question are awarded or acquired is the avoidance of tax or national insurance contributions.

Tax advantages connected with award of shares

No charge on award or acquisition of shares: general

490

(1) This section applies—

(a) on the award to an employee of free, matching or partnership shares under the plan, or

(b) on the acquisition on behalf of an employee of dividend shares under the plan.

(2) The employee is not liable to income tax on the value of the beneficial interest in the shares that passes to the employee at the time of the award or acquisition.

No charge on award of shares as taxable benefit

491

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

492

(1) An employee is not liable to income tax under Part 2 on any amount of the employee’s salary which is deducted as partnership share money under a partnership share agreement.

(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

No charge on acquisition of dividend shares

493

(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) Section 1105(3) of CTA 2010 (information relating to distributions to be provided by nominee) does not apply to any amount applied by the trustees in acquiring dividend shares on behalf of a participant.

(3A) For the exemption of such amounts from income tax, see section 770 of ITTOIA 2005 (amounts applied by SIP trustees acquiring dividend shares or retained for reinvestment).

(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) Subsection (3) is subject to paragraph 80(4)(c) of Schedule 2 (information required where dividend shares cease to be subject to plan).

Tax advantages connected with holding of shares

No charge on removal of restrictions applying to shares

494

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

No charge on increase in value of shares of dependent subsidiary

495

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

No charge on cash dividend retained for reinvestment

496

For the exemption from income tax of amounts retained under paragraph 68(2) of Schedule 2 (amount of cash dividend not reinvested), see section 770 of ITTOIA 2005 (amounts applied by SIP trustees acquiring dividend shares or retained for reinvestment).

Tax advantages connected with shares ceasing to be subject to plan

Limitations on charges on shares ceasing to be subject to plan

497

(1) No liability to income tax arises on free or matching shares ceasing to be subject to the plan, except as provided by—

(a) section 505 (charge on free or matching shares ceasing to be subject to plan), or

(b) section 507 (charge on disposal of beneficial interest during holding period).

(2) No liability to income tax arises on partnership shares ceasing to be subject to the plan, except as provided by section 506 (charge on partnership shares ceasing to be subject to plan).

(3) No liability to income tax arises on dividend shares ceasing to be subject to the plan, except under Chapter 3 or 4 of Part 4 of ITTOIA 2005 (dividends etc. from UK or non-UK resident companies etc.) as a result of section 394(2) or 407(2) of that Act (distribution or dividend payment when dividend shares cease to be subject to plan).

No charge on shares ceasing to be subject to plan in certain circumstances

498

(1) A participant is not liable to income tax on shares ceasing to be subject to the plan if—

(a) they cease to be so subject on the participant ceasing to be in relevant employment, and

(b) subsection (2) applies.

(2) This subsection applies if the participant ceases to be in relevant employment—

(a) because of injury or disability,

(b) on being dismissed by reason of redundancy,

(c) by reason of a relevant transfer within the meaning of the Transfer of Undertakings (Protection of Employment) Regulations 2006,

(d) if the relevant employment is employment by an associated company (see paragraph 95(2) of Schedule 2), by reason of a change of control or other circumstances ending that company’s status as an associated company,

(e) by reason of the participant’s retirement ..., or

(f) on the participant’s death.

(3) A participant is not liable to income tax on shares (“the relevant shares”) in a company (“the relevant company”) being withdrawn from the plan if—

(a) the withdrawal of the relevant shares from the plan relates to—

(i) a transaction resulting from a compromise, arrangement or scheme falling within subsection (9),

(ii) an offer forming part of a general offer falling within subsection (10), or

(iii) the application of sections 979 to 982 or 983 to 985 of the Companies Act 2006 in the case of a takeover offer (as defined in section 974 of that Act) falling within subsection (13), and

(b) as a result of, as the case may be—

(i) the transaction,

(ii) the offer, or

(iii) the application of sections 979 to 982 or 983 to 985 of the Companies Act 2006,

the participant receives cash (and no other assets) in exchange for the relevant shares.

(4) For the purposes of subsection (3)(b) it does not matter if the participant receives other assets in exchange for shares other than the relevant shares.

(5) Subsection (3) does not apply to the relevant shares (or to a proportion of them) if in connection with, as the case may be—

(a) the compromise, arrangement or scheme,

(b) the general offer, or

a course of action was open to the participant which, had it been followed, would have resulted in other assets being received in exchange for the relevant shares (or the proportion of them) instead of cash.

(6) Subsection (3) does not apply to the relevant shares (or to a proportion of them) if it is reasonable to suppose that the relevant shares (or the proportion of them) would not have been awarded to the participant—

(a) had, as the case may be—

(i) the compromise, arrangement or scheme,

(ii) the general offer, or

(iii) the takeover offer,

not been made, or

(b) had any arrangements for the making of—

(i) a compromise, arrangement or scheme which would fall within subsection (9),

(ii) a general offer which would fall within subsection (10), or

(iii) a takeover offer (as defined in section 974 of the Companies Act 2006) which would fall within subsection (13),

which were in place or under consideration at any time not been in place or under consideration.

(7) In subsection (6) the reference to shares being awarded to the participant is to be read, in the case of dividend shares, as a reference to the shares being acquired by the trustees on the participant's behalf.

(8) In subsection (6)(b) “arrangements” includes any plan, scheme, agreement or understanding, whether or not legally enforceable.

(9) A compromise, arrangement or scheme falls within this subsection if it is applicable to or affects—

(a) all the ordinary share capital of the relevant company or all the shares of the same class as the relevant shares, or

(b) all the shares, or all the shares of that same class, which are held by a class of shareholders identified otherwise than by reference to their employment or their participation in a Schedule 2 SIP.

(10) A general offer falls within this subsection if—

(a) it is made to holders of shares of the same class as the relevant shares or to holders of shares in the relevant company, and

(b) it is made in the first instance on a condition such that if it is satisfied the person making the offer will have control of the relevant company.

(11) For the purposes of subsection (10) it does not matter if the general offer is made to different shareholders by different means.

(12) In subsection (10)(b) “control” has the meaning given by sections 450 and 451 of CTA 2010.

(13) A takeover offer falls within this subsection if—

(a) it relates to the relevant company, and

(b) where there is more than one class of share in the relevant company, the class or classes to which it relates is or include the class of the relevant shares.

Tax advantages: supplementary

No charge in respect of incidental expenditure

499

An employee is not liable to income tax in respect of incidental expenditure of—

(a) the trustees,

(b) the company which established the plan, or

in operating the plan.

Scope of tax charges

Operation of tax charges in connection with approved SIP

500

(1) Sections 501 to 508 apply for income tax purposes in connection with shares awarded under a Schedule 2 SIP.

(2) But those sections do not apply to an individual if, at the time of the award of shares in question, the earnings from the eligible employment are not (or would not be if there were any) general earnings to which any of the charging provisions of Chapter 4 or 5 of Part 2 apply.

(3) “The eligible employment” means the employment which results in the individual meeting the employment requirement in relation to the plan.

Charges connected with holding of shares

Charge on capital receipts in respect of plan shares

501

(1) This section applies if conditions A and B are met.

(2) Condition A is that a capital receipt is received by a participant in respect of, or by reference to, any of the participant’s plan shares.

(3) Condition B is that the plan shares in respect of, or by reference to, which the capital receipt is received are—

(a) free, matching or partnership shares that were awarded to the participant less than 5 years before the participant received the capital receipt, or

(b) dividend shares that were acquired on behalf of the participant less than 3 years before the participant received the capital receipt.

(4) If this section applies, the amount or value of the capital receipt counts as employment income of the participant for the relevant tax year.

(5) The “relevant tax year” is the tax year in which the participant receives the capital receipt.

(6) This section does not apply if the capital receipt is received by the participant’s personal representatives after the death of the participant.

(7) Section 502 explains what is meant by a “capital receipt”.

Meaning of “capital receipt” in section 501

502

(1) This section applies for determining whether any money or money’s worth is a “capital receipt” for the purposes of section 501.

(2) The general rule is that any money or money’s worth is a “capital receipt” for the purposes of section 501.

(3) The general rule is subject to the following exceptions.

(4) Money or money’s worth is not a capital receipt for the purposes of section 501 to the extent that—

(a) it constitutes income in the hands of the recipient for the purposes of income tax or would do so but for sections 489 to 498 (SIPs: tax advantages) or section 770 of ITTOIA 2005 (exemption for amounts applied by SIP trustees acquiring dividend shares or retained for reinvestment),

(b) it consists of the proceeds of disposal of the plan shares mentioned in section 501, or

(5) If, as a result of a direction given by or on behalf of the participant for the purposes of paragraph 77 of Schedule 2 (power of trustees to raise funds to subscribe for rights issues), the trustees—

(a) dispose of some of the rights under a rights issue, and

(b) use the proceeds of that disposal to exercise other such rights,

the money or money’s worth constituting the proceeds of that disposal is not a capital receipt for the purposes of section 501.

503

(1) Any amount paid over to an individual under any of the provisions of Schedule 2 mentioned in subsection (2) counts as employment income of the individual for the relevant tax year.

(2) The provisions are—

paragraph 46(5) (deductions in excess of permitted maximum amount),

paragraph 50(5)(b) or paragraph 52(6)(b) (surplus partnership share money remaining after acquisition of shares),

paragraph 52(7) (partnership share money paid over on individual ceasing to be in relevant employment),

paragraph 52(8) (partnership share money paid over where accumulation period brought to an end by event specified in plan),

paragraph 55(3) (partnership share money paid over on withdrawal from partnership share agreement), or

paragraph 56 (partnership share money paid over on plan ceasing to be a Schedule 2 SIP or termination of plan).

(3) The “relevant tax year” is the tax year in which the amount is paid over.

504

(1) This section applies if an individual who has entered into a partnership share agreement receives any money or money’s worth in respect of the cancellation of the agreement.

(2) The amount of the money or the value of the money’s worth counts as employment income of the individual for the relevant tax year.

(3) The “relevant tax year” is the tax year in which the individual receives the money or money’s worth.

Charges connected with shares ceasing to be subject to plan

Charge on free or matching shares ceasing to be subject to plan

505

(1) When free or matching shares cease to be subject to the plan, there may be an amount that counts as employment income of the participant depending on the period that has elapsed between—

(a) the date when the shares were awarded to the participant (“the award date”), and

(b) the date when they cease to be subject to the plan (“the exit date”).

(2) If the period is less than 3 years, the market value of the shares at the exit date counts as employment income of the participant for the relevant tax year (see subsection (5)).

(3) If the period is 3 years or more but less than 5 years, whichever is the lesser of—

(a) the market value of the shares at the award date, and

(b) the market value of the shares at the exit date,

counts as employment income of the participant for the relevant tax year (see subsection (5)).

(4) Where—

(a) subsection (3) applies, and

(b) the applicable amount is the market value of the shares at the award date,

the tax due is reduced by the amount or aggregate amount of any tax paid by virtue of section 501 (charge on capital receipts in respect of plan shares) on any capital receipts in respect of the shares.

(4A) Any tax due under subsection (2) or (3) is reduced by the amount or aggregate amount of any tax paid by virtue of Chapter 3B of this Part in relation to the shares.

(5) The “relevant tax year” is the tax year in which the exit date falls.

(6) No liability to tax arises by virtue of this section—

(a) on the forfeiture of free or matching shares,

(b) if section 498 (no charge on shares ceasing to be subject to plan in certain circumstances) applies, or

Charge on partnership shares ceasing to be subject to plan

506

(1) When partnership shares cease to be subject to the plan, there may be an amount that counts as employment income of the participant depending on the period that has elapsed between—

(a) the acquisition date in respect of those shares (as defined by paragraph 50(4) or, as the case may be, paragraph 52(5) of Schedule 2), and

(b) the date when they cease to be subject to the plan (“the exit date”).

(2) If the period is less than 3 years, the relevant amount counts as employment income of the participant for the relevant tax year (see subsection (5)).

(2A) Subject to subsection (2B), in subsection (2) “the relevant amount” means the market value of the shares at the exit date.

(2B) If the shares cease to be subject to the plan by virtue of a provision of the kind mentioned in paragraph 43(2B) of Schedule 2 (provision requiring partnership shares to be offered for sale), in subsection (2) “the relevant amount” means the lesser of—

(a) the amount of partnership share money used to acquire the shares, and

(b) the market value of the shares at the time they are offered for sale.

(2C) Paragraph 92(2) of Schedule 2 (market value of shares subject to a restriction) applies for the purposes of subsection (2B)(b).

(3) If the period is 3 years or more but less than 5 years, whichever is the lesser of—

(a) the amount of partnership share money used to acquire the shares, and

(b) the market value of the shares at the exit date,

counts as employment income of the participant for the relevant tax year (see subsection (5)).

(3A) If the shares cease to be subject to the plan by virtue of a provision of the kind mentioned in paragraph 43(2B) of Schedule 2, in subsection (3)(b) the reference to the market value of the shares at the exit date is to be read as a reference to the market value of the shares at the time they are offered for sale (as determined in accordance with paragraph 92(2) of Schedule 2 if relevant).

(4) Where—

(a) subsection (3) applies, and

(b) the applicable amount is the amount of partnership share money used to acquire the shares,

(4A) Any tax due under subsection (2) or (3) is reduced by the amount or aggregate amount of any tax paid by virtue of Chapter 3B of this Part in relation to the shares.

(5) The “relevant tax year” is the tax year in which the exit date falls.

(6) No liability to income tax arises by virtue of this section if section 498 (no charge on shares ceasing to be subject to plan in certain circumstances) applies.

Charge on disposal of beneficial interest during holding period

507

(1) This section applies if—

(a) free or matching shares cease to be subject to the plan at any time during the holding period for those shares, and

(b) this occurs as a result of the participant assigning, charging or otherwise disposing of the participant’s beneficial interest in the shares in breach of obligations under paragraph 36(1)(b) of Schedule 2 (restrictions relating to disposals within holding period).

(2) The market value of the shares at the date when they cease to be subject to the plan counts as employment income of the participant for the relevant tax year.

(3) The “relevant tax year” is the tax year in which that date falls.

Identification of shares ceasing to be subject to plan

508

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