Employee share options and share ownership - made simple by The RM2 Partnership - Share option, Share incentive, Executive share option

Practitioners lobby for end to tax trap

Thu 8th November 2007

The Employee Share Ownership Centre and Clifford Chance are leading calls for a change in the tax rules that apply to share schemes when a company is taken over.

Often, when a company is acquired, employees will cash in their share scheme benefits and the company will receive corporation tax relief on the value passing to the employees. However if the company is already under the control of the acquiror, any tax relief may be lost. This is because the relief depends on the shares in question being qualifying shares. Shares are not qualifying shares if they are shares in a subsidiary of a holding company, unless that holding company is listed on the main London Stock Exchange (or an overseas "recognised" exchange.

If, therefore, an employee exercises his option after a change of control involving an unlisted acquiror, any corporation tax relief that may have been available is lost. Many companies are unaware of this rule and as a consequence the Treasury is able to keep its hands on large sums of money that otherwise would have been paid out in tax relief.

In many cases, even if the problem is identified in time, nothing can be done to avert it. This is because option agreements often contain a provision that exercise may take place only after a change of control can take place. HMRC wil normally accept, in relation to Enterprise Management Incentive schemes (EMI share options) that the rules can be changed to permit exercise immediately before the change of control. However this is not possible with other forms of option such as SAYE (Save As You Earn) share options.

This is a particular problem with certain private equity deals where the ownership structure post-acquisition may involve a controlling corporate entity (or it may look that way - some private equity arrangements that look to be corporate controlled turn out, on technical grounds, not to be so controlled).

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