Taxation of employee share schemes

Unless specific tax rules apply, any benefit passing from an employer to an employee through an employee share scheme will normally be subject to income tax at the employee’s highest rate. This will include the value of any shares gifted, any discount on shares acquired through a share purchase scheme, or any profit realised from exercising a share option.[24] 

The tax treatment available to arm’s length investors is much more favourable. Investors pay capital gains tax on their gains. If the shares are unlisted, they will (subject to certain requirements) qualify for business asset taper relief, which dramatically reduces the tax payable the longer the asset is held.[25] After two years, the effective tax rate can be 10 per cent. or less, and no national contributions are payable. 

Statutory schemes work by allowing employees, within strict limits, to be treated more like arm’s length investors than employees. Not surprisingly, the tax avoidance industry has devoted considerable effort to designing schemes that can achieve the same result without being encumbered by the rules of statutory schemes. Much of the tax legislation surrounding employee schemes has been designed to counter this avoidance.

In the past, many such avoidance schemes relied on the manipulation of the properties of private company shares. For example, employees might be awarded shares with heavily restricted rights. These “restricted shares” were arguably of little value, thus minimising the taxable value of the award. Later, the shares would gain value when the restrictions expired or were removed. In other cases, shares would be awarded at a low value for tax purposes but they would then convert into other securities of higher value: these are sometimes known as “flowering shares”. 

Many of these schemes were based on misunderstandings of the law rather than exploitation of genuine loopholes. However, new measures to deal with such schemes were introduced in the Income Tax (Earnings and Pensions) Act of 2003 (“ITEPA 2003”) which offers a unified, if complex, taxation regime for dealing with all forms of restricted and convertible (flowering) shares. We deal with each situation in turn.

Restricted shares

These restrictions can include:

UK tax law makes a distinction between the actual fair value of a share, taking account of all the restrictions attaching to it, and the unrestricted fair value of the share. Reflecting the algebra contained in the legislation, these concepts are often referred as “AMV” – actual market value; and “UMV” – unrestricted market value. In relation to unquoted shares, the term “market value” refers to the concept of fair value that would be agreed between prudent buyer and willing seller, assuming the buyer has the information he might reasonably expect. For a fuller description of how unlisted shares are valued see page 90.

The general principle is that when restricted shares are acquired by an employee, the value of the shares, less any amount paid for them by the employee, will be subject to income tax. Subsequently, if the restrictions are lifted (or fall away on sale), income tax will be payable on that proportion of the sale proceeds which is equal to the proportion of the original value that was untaxed. Expressed another way, income tax is charged on the proportion of value that escaped tax at the outset, because of the restrictions, plus any subsequent gains that accrue to that proportion. The other gains are normally subject to capital gains tax, not income tax, since that part of the value of the shares was already fully taxed, or had already been paid for, at the outset.

For example, if shares worth £1 each are gifted to an employee with restrictions that reduce their value to 70p, then the employee will initially pay income tax on 70p. If the shares are subsequently sold for £2, in a situation where the restrictions no longer apply, the employee will pay income tax of 60 pence, being 30 per cent. of the unrestricted sales proceeds. This is equal to 30 per cent. of the original untaxed value (£1) plus 30 per cent. of the gain (£1). He or she will also pay capital gains tax on the remaining 70 per cent. of the gain (70p), subject to available reliefs.

The amount subject to income tax is reduced to take account of expenses incurred in acquiring the shares or releasing the restriction, and credit is also given for tax paid in relation to any previous chargeable events. 

Meaning of “restricted”

Not all shares that have restricted rights are restricted shares for tax purposes. Shares with rights that are intrinsically restricted, for example a class of non-voting shares, or a class of shares with limited dividend rights, are not treated as restricted shares for tax purposes. On the other hand, if only certain holders of that class are unable to vote the shares (or receive dividends, as the case may be), then these shares will be restricted in comparison to the other shares of that class. 

A similar distinction is made when shares are sold. If the restrictions are personal to the holder then they are likely to fall away when the shares are transferred. In other cases, the restriction may be inherent in the shares and persist beyond the point of sale – for example, a restriction on employees selling to non-employees. In the first case, income tax will be charged on a portion of the proceeds on sale, representing the untaxed value of the restrictions on the shares when they were acquired, plus the subsequent gains attributable to that value. The balance will be chargeable to capital gains tax. In the second case, there is no proportion of the sale proceeds attributable to the value of the restrictions, since the restrictions still apply. Accordingly, the gains should normally be subject to capital gains tax only.[26]

Employee elections

An employee can escape an income tax charge on share gains by electing to pay income tax at the outset on the full, unrestricted value of the shares. Thus if the restricted value is 70p but the unrestricted value is £1, he or she will now pay income tax on £1. More income tax has been paid initially but there is now no “untaxed portion” in the original share value and accordingly only capital gains tax will be payable on any subsequent gains.

This election to be taxed initially on unrestricted market value is made under section 431(1) ITEPA 2003.[27] The election is signed by both employee and employer.[28] If the shares seem likely to rise substantially in value then it may be worth paying more income tax initially in order to enjoy capital gains tax reliefs later, especially if the gains tax will be reduced by business asset taper relief.[29] 

A special rule applies if shares are restricted by a risk of forfeiture. For example, an employee may be given shares on the basis that they must be handed back to the company if he fails to complete a minimum period of service. In this case the tax treatment is that if the risk of forfeiture will cease within 5 years of their being acquired, no tax is payable on acquisition but instead tax will be payable, as and when the risk of forfeiture ceases, on their value at that time. This rule does not apply if the risk of forfeiture can continue for more than five years.

An election can be made under section 425(3) ITEPA 2003 to disapply the deferral of income tax for shares subject to the risk of forfeiture within five years. As in the case of a section 431(1) election, the advantage is that subsequent gains should be taxed as capital not income. 

Elections under sections 425(3) and 431(1) ITEPA 2003[30] must be made within 14 days of the transaction. This short time-scale is designed to prevent taxpayers waiting to see how the value of the shares is moving before deciding whether to make an election. The elections are not submitted to HM Revenue & Customs but retained by the taxpayer for possible inspection at a later date.

If the value of the shares falls after elections are made under either section 425(3) or 431(1), this can result in income tax being paid on benefits that have not been received. However if the shares are then disposed of at arm’s length, or are written off, it may be possible to set the loss against either other taxable income or other taxable gains.

Convertible securities 

A security is regarded as convertible if it can or will be exchanged for another security of a different type. This is so whether the conversion is voluntary or obligatory. If, by contrast, the security has rights which may increase in value over time, such as those resulting from the operation of an equity ratchet (see Glossary) in a management buy-out, then it will not be subject to the convertible securities regime.

In general, when a convertible security is acquired, income tax is paid on its value (less any amount paid for it) without taking account of the value that may arise on conversion. “Security” in this context can include convertible loan stock. Income tax is then paid again when the security converts,[31] and is charged on the gain – that is, the fair value of the securities acquired through conversion less the fair value of the original securities at the conversion date (ignoring the value of their conversion rights). Any increase in the value of the original shares up to the date of conversion (ignoring the value of conversion rights) is subject to capital gains tax. Credit is available for any amount paid for the conversion.

For example, if convertible shares are acquired for £1 each, being their fair value ignoring conversion rights, and later convert into a different class of shares worth £2 each, at a time when the original shares were worth £1.60 (ignoring the value of conversion rights) then capital gains tax is payable on 60 pence and income tax on 40 pence.

The legislation dealing with restricted and convertible shares relies heavily on algebra. In some circumstances, the equations can produce surprising results and professional advice should be sought.

New ventures

Securities are “employment-related” if they are provided by a person’s employer, even if they were not issued in connection with the employment, unless it can be shown that the shares were gifted to a family member for personal reasons. If employment related securities are acquired at a discount to arm’s length fair value, then prima facie this gives rise to a benefit in kind subject to income tax. If the shares fall within the restricted or convertible regimes described above then additional income tax may be due on subsequently realised gains in value. All acquisitions of employment-related securities, irrespective of value, must be reported to HM Revenue & Customs.

HM Revenue & Customs normally accepts that shares acquired at nominal value at company formation will not be regarded as acquired at an undervalue if the shares were acquired directly at formation (or from a company formation agent), all the shares were issued at nominal value, and the shares were not acquired in connection with employment with another company.

Problems can nevertheless arise if the company starts with an “endowment” of value, such as pre-existing contracts or established know-how, which could be said to give it a market value. It may be that individuals will themselves supply value in the form of expertise or a client base, and in return receive a “carried interest” in the shares (i.e. free or low cost shares). They may be participating in a management buy-out or buy-in where they have acquired equity relatively cheaply but at high risk. In all these cases a tax charge could arise if the individual is able to obtain shares at less than the hypothetical “fair value” between unconnected willing buyer and willing seller.

In an attempt to clarify the position the British Venture Capital Association and HM Revenue & Customs have entered into two memoranda of understanding. These deal, respectively, with co-investments by managers and venture capital backers, and situations where members of a limited liability partnership are also employees. The memoranda set out certain principles which, if adhered to, will normally represent a “safe haven” from possible attack by HM Revenue & Customs. 

With regard to venture capital co-investments, the conditions are that:

The memoranda also set out a “safe haven” for ratchet arrangements (see Glossary) the main requirement being that the managers should pay a price for their equity which reflects their maximum economic benefit – that is, assuming all performance targets are met. It is therefore acceptable to have a ratchet which dilutes management shares after they have acquired them at full value; it is not acceptable if the ratchet enhances the value of those shares.

The principle is similar in the case of limited liability partnerships. Broadly, HM Revenue & Customs will not seek to impose a tax charge on the recipient of employee related securities so long the price paid is the same as the price paid by non-employed investors. The rules appear to contain no recognition of the intrinsic value that an individual may bring to a joint investment situation, for example in terms of client relationships or intellectual property rights.

A specific problem was identified in 2003/04 in relation to spin-out ventures from universities and other research institutions. Often these ventures receive an endowment of intellectual property rights (“IPR”) from the research institution. However if the employees working with this IPR were to be incentivised with shares or rights over shares in the companies concerned, they could be taxed on the value of the donated IPR. There was some evidence that this was resulting in a reduction in the number of spin-out companies being formed. 

To address this problem the rules were amended with effect from 2nd December 2004 so that the intellectual property is disregarded when assessing the value of securities (or rights over securities) transferred from a research institution to researchers in a spin-out company.[32]

To benefit from this treatment the individuals must be “engaged” (not necessarily employed) in the development of the intellectual property that has been transferred, and the shares (or interests therein) must be acquired by the individuals within 183 days of the intellectual property being transferred from the university. Spin-outs set up before December 2004 were able to elect prior to 15th October 2005 for a tax treatment that would ensure, in broad terms, that no income tax and national insurance would be payable unless and until the company was successful.

Gifts of shares

If a gift of shares is from one family member to another, and the recipient is an employee, it may be possible to satisfy HM Revenue & Customs that the gift is for family reasons only. The donor may be subject to capital gains tax, since when an individual makes a gift he or she is treated as disposing of the asset at market value whether or not anything is received in return. The capital gains tax liability can in certain cases be passed to the employee by means of a “roll-over election”. The donor and donee jointly elect that the base cost for the donee will be the base cost for the donor. Any business asset taper relief accrued by the donor is lost. The donor must be an individual, and the shares must be unlisted or the donor must have an interest of 5 per cent. or more at the time of transfer.[33]

If the trustees of a non-statutory employee trust gift shares to an employee in circumstances where the employee pays income tax on their value, HM Revenue & Customs will, by extra-statutory concession and subject to certain conditions, relieve the trustees of liability to capital gains tax on the same shares. The recipient must not have an interest in 5 per cent. or more of the share capital. In addition, if the shares are readily convertible assets (broadly, shares that are convertible to cash by any means or which are not corporation tax deductible – see Glossary) any benefits subject to income tax will also be subject to employers’ national insurance contributions.

Capital gains tax

Where capital gains tax applies to benefits from a share scheme, the rate is initially assessed at the same rate as the individual’s marginal income tax rate, that is, 22 per cent. or 40 per cent. The amount of taxable gain is added to the individual’s income to assess the marginal rate. Thus someone earning £30,000 per year would need only small taxable gains to take him or her into the 40 per cent. tax band.

However, the taxable gain can be reduced by business asset taper relief. This is normally available if the shares are in the employing company or a holding company; or if the employee holds 5 per cent. or more of the share capital; or if the shares are in any unlisted company, whether the individual has a connection with it or not. In the case of non-trading companies, the individual must be an officer or employee who does not have a “material interest” (defined as, broadly, an interest of more than 10 per cent. in the company). 

The relief is as follows:

Business asset taper relief

Number of complete years between grant of option and sale of shares acquired

Proportion of gain subject to tax

(per cent.)

Effective tax rate on gain for higher rate tax payer

(per cent.)

0

100

40

1

50

20

2 or more

25

10

If a share is not a business asset, a much less generous rate of taper relief applies. Once three years has expired from the date of acquisition, the amount of gain subject to tax is reduced by 5 percentage points per year until, after 10 or more years, the amount of gain subject to tax is 60 per cent. of the actual gain.

Situations can arise where a share ceases to be a “business asset” at some point during the period of ownership – where, for example, an individual ceases to have a material interest in a non-trading company. the share is listed and the individual ceases to be an employee. Alternatively the shares might be become listed and the holder cease to be an employee, in which case the shares would cease to be business assets. In these cases, the gain is split pro-rata between the periods. If an asset ceases to be a business asset, then the longer it is held the greater the proportion of time it will have been held as a non-business asset. This may result in a rise in the overall tax rate.

Where shares of the same type are acquired on two or more occasions, gains on sale are taxed on a “last in, first out” basis. This will generally result in the shares with the least gains being taxed first, so that taxation of the total gains is partly deferred. This may also reduce tax payable if it results in a longer effective taper period for business asset taper relief. However the position can become complex if the value of the shares rises and falls over time.[34]

If an existing shareholder enters into an arrangement to sell shares to employees (or to a trust) at a fixed price over time, entitlement to business asset taper relief may be lost from that point forward if the arrangements mean that he or she is no longer substantially exposed to the risks and rewards of holding the shares.[35]

The amount of gain subject to capital gains tax (after the application of business asset taper relief, if any) is also reduced by the personal capital gains tax exemption of £8,800 per year (2006/07 tax year).[36] To the extent that this allowance has not already been utilised, gains on the sale of shares acquired through an employee share scheme (after any reduction through the operation of business asset taper relief) will be free of tax up to that limit.[37] If sales are spread over several tax years multiple personal exemptions can be utilised.

This exemption is available to both husband and wife, and transfers between spouses, if permitted by the articles of association, are tax free. Prior to sale of shares acquired, therefore, one spouse could transfer sufficient shares to the other so that his/her capital gains tax exemption is also utilised. However a transfer of shares from husband to wife may have implications for business asset taper relief. If the availability of this relief depended on the status of the husband as an employee, and the wife is not an employee (or vice versa), business asset taper relief may be lost for the entire period of husband/wife ownership. Ordinary CGT taper relief would be available, but this is much less generous.[38]

Shares acquired through an Approved SAYE Option Scheme, or an Approved Share Incentive Plan, can be transferred directly to an Individual Savings Account (ISA) up to the annual ISA limit. If this is done within 90 days of acquisition of the shares, they can subsequently be sold free of tax. This opportunity is not available for shares acquired through the Approved CSOP Scheme or Enterprise Management Incentive. 

Capital gains tax is normally calculated via self-assessment. If an employee wishes to have an advance estimate of the tax that will become payable, application for a “post-transaction check” can be made to HM Revenue & Customs Share valuation, using form CG34.

Corporation tax

Where an employee makes a profit from a share option, there is a cost to the other shareholders. The employee’s profit represents the extent to which he or she has underpaid for the shares, thus reducing the value attributable to other shareholders. Corporation tax relief may well be available in respect of this cost. The precise nature of any such relief will depend on the nature of the scheme.

Relief will not be available if the employing company is not within the charge to corporation tax, so that options exercised by employees of an overseas subsidiary of a UK parent company will not generate relief. 

Care is needed in takeover situations if the acquiror is unlisted. Any outstanding options in the company being acquired should ideally be exercised at or before the time that the acquisition completes. Any options left unexercised after completion will be in respect of shares in a subsidiary of an unlisted company and therefore no longer eligible for corporation tax relief. However if the grantor of the options was an employee benefit trust, it may still be possible to claim relief in relation to the trust. 

If the shares concerned are subject to forfeiture, then corporation tax relief will be available to the extent that an income tax charge arises on the individual by virtue of the risk of forfeiture being lifted. 

Transfer pricing

The Taxes Acts require that groups of companies should account accurately for the costs of goods and services provided by one group company to another. The legislation was originally designed with the main purpose of preventing UK companies from transferring profits into low tax jurisdictions by means of artificial intra-group transactions. 

In a group of companies, the parent (or other group company) may decide to offer share incentives to employees of one or more other group companies. This is likely to involve a transfer of value from the company establishing the scheme to one or more other companies whose employees are participating in the scheme. 

Normally, if all the companies in a group are within the UK, intra-group transactions will cancel each other out in terms of the group liability to corporation tax. However, this does not necessarily apply in the case of employee share schemes. The position is broadly as follows:

Guidance issued by HM Revenue & Customs in 2003 stated that the value of services provided by the employer should include the value of the share themselves. The share value should be estimated in line with FRS20, i.e. by means of an option pricing model. Under this approach the amount of the deemed payment by the employer to the parent could approach or even exceed the eventual value of the benefit on which corporation tax was claimed.[42] On the other hand awards satisfied by the issue of new shares appeared to be outside this regime.

This guidance still applies to accounting periods beginning before 1st January 2005 but in August 2005 HM Revenue & Customs issued revised guidance for later accounting periods. In summary, this follows FRS20 in treating the value of shares provided by a parent company for a share scheme as a capital, not revenue item. Accordingly, no charge to corporation tax arises. However the value of administrative services is still chargeable in the hands of the provider and HM Revenue & Customs has indicated that it will use the tax arbitrage provisions of the Finance Act 2005 to negate any perceived tax advantage.

PAYE and NICs

Generally, if an employee receives benefits in the form of shares that are “readily convertible assets” (see below and Glossary) then the benefit will be treated as if it were cash remuneration and subject to PAYE. Benefits in the form of shares that are not “readily convertible assets” are dealt with via P11D after the year end.

In general, amounts subject to PAYE are also subject to national insurance contributions. This can represent a heavy additional burden since the current rate for employers is 12.8 per cent.[43] Employees also pay employee national insurance contributions (“NICs”) at 11 per cent. if the amount of benefit, together with their other taxable income, is less than £32,400 per year and at an incremental rate of 1 per cent. in relation to taxable income is above this figure (rates for 2005/2006).

Shares are readily convertible assets if, broadly, they can be traded on any public market or if “trading arrangements” are in place. Trading arrangements could include the operation of an internal market by an employee benefit trust, or arrangements made by a company to buy back shares from employees for cash on a pre-agreed formula. The authorities will deem trading arrangements to exist where active steps have been taken to set up the arrangements, even if they are not yet in place.

Shares are also deemed “readily convertible” if their value to employees is not available as a deduction from taxable profit. This will apply if the shares were not acquired by an individual by reason of employment or if the company is:

The purpose of these rules seems to be to prevent companies obtaining a tax advantage by offering shares in the shares of a subsidiary, unlisted offshore company or unrelated company, the values of which might then be manipulated.

PAYE is due on some share related benefits even if the shares concerned were not previously “readily convertible”. If the shares are in fact sold for cash or other assets that are readily convertible, then the shares themselves are deemed to have become readily convertible. The same applies if the rights or benefits attaching to shares are enhanced (for example by conversion) and the employee receives cash or readily convertible assets in relation to that enhancement.

PAYE must be accounted for and paid according to strict regulations summarised on page 111. 

NIC elections

Secondary NICs (that is, NICs paid by the employer) may result in a significant cash cost to the company when non-statutory share-based benefits mature. This is a particular problem for smaller, rapidly growing companies since they may require all their cash and more to finance their growth. To alleviate this problem, regulations have been introduced which in certain circumstances permit the employer and employee jointly to elect that the liability for employer NICs will be met by the employee.[44]

At its simplest, the election can form part of the agreement creating the share incentive. In this case the participant agrees that as a condition of being able to realise his or her gains, the participant will indemnify the employer against the NIC. An indemnity can be given in respect of share options, conditional LTIPs, restricted securities, convertible securities and cash payments made to give up the rights to any of the foregoing. Accordingly an indemnity cannot be given in respect of the unconditional acquisition of unrestricted and non-convertible shares.

An indemnity given by an employee protects the employer against liability to national insurance contributions but does not transfer the legal liability from the employer to the employee. Auditors of US companies, in particular, tend to insist on a transfer of legal liability. This is permitted under UK law but an election transferring legal liability will normally be entered into as a separate deed and must be approved by HM Revenue & Customs before it can take effect.

NIC liabilities can arise with statutory as well as non-statutory schemes, for example on a share option exercise outside the rules of the scheme or loss of eligibility by either the recipient or the grantor of the option.

Where an election is made, the additional tax payable by the employee can be deducted from his or her taxable income, resulting in a net charge of 7.68 per cent. on the employee (assuming employee pays 40 per cent. income tax and is not contracted out for state pension purposes).

Overseas awards

If an employee receives an award of share options while not resident or ordinarily resident in the UK, and then exercises them on returning to the UK, there will normally be no income tax to pay on any gains as long as the options were not originally granted as part of a compensation package in relation to UK employment. If at the time of grant the option the employee was resident but not ordinarily resident in the UK (for example, a British born employee working mainly overseas but also partly in the UK) then the gain may be apportioned on a time basis.

However, if the award is in the form of shares that vest at a predetermined time then the employee then the employee is liable to income tax on the value of the shares at the date the award vests.

Gains that are not subject to income tax may nevertheless be subject to capital gains tax. However, if an employee returns to the UK having been neither resident nor ordinarily resident in the UK at any time during the previous five tax years the employee is, by extra-statutory concession, liable to capital gains tax only on gains arising from disposals made after the date of return.[45]

Stamp duty

When issued shares are transferred from one holder to another, stamp duty is normally payable by the acquiror at the rate of ½ per cent. on the amount of consideration, rounded up to the nearest £5 and with a £5 minimum. Duty is also payable if a share option is released in exchange for a consideration. Where there is no consideration (as in a gift of shares by trustees to employees) no stamp duty is payable. No duty is payable on the acquisition of new shares issued by a company.

Duty is therefore payable by employees on exercise of an option (whether statutory or non-statutory) if the shares acquired are already in issue (e.g. shares held by an employee trust) but not if they are new shares issued by the company. Duty is also payable by employee benefit trusts when acquiring shares from existing shareholders. A special relief prevents double duty on Partnership Shares or Dividend Shares acquired by employees from the trustees of an Approved Share Incentive Plan.

Deeds of employee trusts are not normally subject to stamp duty as long as the trust contains no assets (other than cash) at the time of execution.

[24] If a person A provides services to company B through a personal services company C, and either A or C receives equity based rewards, income tax is payable. This also applies if A receives equity based rewards while employed by company D which is connected with B (“connected” is defined, broadly, by reference to family relationship or common ownership).

[25] Shares in listed companies held by employees also qualify for business asset taper relief. For a fuller exposition of this relief see page 30.

[26] This however requires that the ratio of restricted to unrestricted market value is the same on sale of the shares as it was at the original purchase. This may not always be the case. If the ratio falls, then some income tax will be due.

[27] An automatic election under s 431(1) is deemed to be made when an employee acquires shares under any of the government sponsored schemes, namely the Enterprise Management Incentive, SAYE Option Scheme, Share Incentive Plan or CSOP Scheme, provided that the shares are acquired in circumstances where no tax arises. 

[28] If there are more than a few employees a two part form can be completed where the employer needs to sign only once in respect of all the employees.

[29] There are some circumstances in which restricted shares may not qualify for business asset taper relief. For example, if shares subject to restrictions on sale or to a risk of forfeiture are transferred to employees by an employee trust, HM Revenue & Customs may take the view that the beneficial rights to ownership have not been fully transferred. Business asset taper relief will then not be available until the restrictions are lifted. Taper relief will also not be available if there are arrangements to remove or substantially limit the shareholder’s exposure to fluctuations in the value of the shares (see also note 34 on page 32).

[30] Elections are also available under section 431(2), to disapply the value of specified restrictions for tax purposes, and section 430, to switch to the unrestricted share value for tax purposes following a chargeable event. The 14-day rule applies to these also.

[31] There is an exemption where all the shares of a class convert at the same time, there is no avoidance motive and either the company is employee controlled (through holdings of that class) or a majority of the share class are not employment-related securities (see Glossary).

[32] The legislation deems that if this treatment applies there will be an automatic s 431(1) election although it is also possible to opt out of this election.

[33] Alternatively, the donor can be the trustees of a trust and either the shares are unlisted or the trustees must have an interest of 25 per cent. or more.

[34] If shares are acquired on the same day through two or more transactions, they are normally treated as being the same transaction. However if some of the shares were acquired through a statutory share option scheme an election is available under s 105 TCGA 1992 to allow these shares to be treated as disposed of after the others, thereby allowing greater deferral of CGT. The election must be made by the second January 31st following the transaction and once made applies to all part-disposals of the shares in question.

[35] For this to apply, the holder must lose substantial exposure to both the upside potential and the downside risk. HM Revenue & Customs considers that to avoid loss of relief the residual exposure to the upside or the downside must be not less than 20 per cent.

[36] Trustees of discretionary employee trusts, including Share Incentive Plan trusts, have an annual exempt amount equal to half the personal rate (£4,250 in 2005/06).

[37] Business asset taper relief reduces the taxable gain, not the rate of tax. Therefore if the full £8,500 allowance is intact it means that the first £34,000 of gains with full taper relief will be tax free (£34,500 ÷ 4 = £8,500).

[38] The chargeable gain is reduced on a sliding scale by amounts ranging from 5 per cent. after three years’ ownership to 40 per cent. after 10 years’ ownership or more (2005/06 rates).

[39] In an unquoted company fair value is negotiated with HM Revenue & Customs. Any price paid to receive an option under an Enterprise Management Incentive Scheme would be added to the exercise price for the purposes of this calculation.

[40] “Listed” in this context includes overseas exchanges “recognised” by HM Revenue & Customs. However shares in a subsidiary of a listed company that is close (see Glossary) or would be close if it were in the UK, will not qualify for relief.

[41] This is subject to a number of rules summarised in the previous section (page 33 et seq.)

[42] In some circumstances, FRS20 allows post-grant adjustments; see page 113.

[43] 9.3 per cent. if contracted out in relation to a salary related scheme or 11.8 per cent. if contracted out in relation to a money purchase scheme (2005/06 rates). 

[44] The Child Support, Pensions and Social Security Act 2000 and the Finance Act 2000, as amended. 

[45] Extra-statutory concession D2.