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20 December 2000
The missing link
My understanding is that section 140A, Taxes Act 1988 generally restores the position on conditional shares to what the Revenue had previously thought it to be – namely that a charge to tax on the award of a conditional interest in shares arises when the condition is lifted rather than when the share is awarded. This is what most commentaries on section 140A say.
My understanding is that section 140A, Taxes Act 1988 generally restores the position on conditional shares to what the Revenue had previously thought it to be – namely that a charge to tax on the award of a conditional interest in shares arises when the condition is lifted rather than when the share is awarded. This is what most commentaries on section 140A say.
The missing link
My understanding is that section 140A, Taxes Act 1988 generally restores the position on conditional shares to what the Revenue had previously thought it to be – namely that a charge to tax on the award of a conditional interest in shares arises when the condition is lifted rather than when the share is awarded. This is what most commentaries on section 140A say.
But the legislation explicitly preserves any charge under section 135 on the acquisition of the conditional interest. This seems to mean that if an employee is given shares which are subject to risk of forfeiture, there will usually be no tax charge on acquisition; but that if he exercises an option to acquire shares subject to the same risk of forfeiture, there will be a tax charge. This seems a bizarre result – what have I missed?
(Query T15,731) – Confused of Tunbridge Wells.
Perhaps this will seem less bizarre on recollecting that sections 135 and 140A, Taxes Act 1988 treat two different, if often interrelated, assets. Shares and options are not the same thing. Section 140A covers shares received by a director or employee at an undervalue so as to prompt a benefit assessment. It provides that the benefit is only assessable when the shares vest unconditionally in him, or he contrives to sell them. If their vesting is subject to a condition, it must be satisfied, or he must sell the shares, before the assessment is made. There is an exception; if the condition will, or may, endure for five years or more, the benefit is assessed at once.
Section 135 covers options to acquire shares. The asset is not the shareholding, but the option to acquire it, and assessment occurs when the asset is dealt with, which can be by exercise, assignment, or release, and a gain results. If the option is capable of enduring for ten years or more, a benefit is assessed when it is granted, and the liability arising is regarded as on account of the liability on the overall gain, but with no repayment in the event of a loss.
In both cases, the benefit is computed as the market value of the asset less anything actually paid for it. – Canterbury.
Editorial note. Very few readers attempted an answer to this question. Hopefully the following paragraphs reproduced from Tolley's Practical Guide to Employees' Share Schemes by Colin Chamberlain (paragraphs 6.32 and 6.33) may provide some enlightenment, especially when coupled with recognition that common sense and tax have never been happy bed fellows.
Until 17 March 1998, the allocation of the beneficial interest in shares by a director or employee on conditional terms was in practice usually treated by the Inland Revenue as giving rise to income tax only at the date the interest in shares was no longer subject to any risk of transfer, reversion or forfeiture (generally known as 'vesting'). There appeared to be some authority for this approach in the case of Edwards v Roberts [1935] 19 TC 618 which involved employees who had contingent interests in a 'conditional fund' which vested after five years unless forfeited before the time and the court held that tax should apply at vesting rather than allocation of the contingent interests. Nevertheless, following the receipt of legal advice, an announcement was made in the Inland Revenue Tax Bulletin, June 1998, at page 545 that where shares had been 'acquired' beneficially by an employee subject to a risk of forfeiture that the proper tax treatment was that any discount was chargeable under the general principles of Schedule E at the date of the beneficial acquisition, and not when the risk of transfer, reversion or forfeiture ceased. An announcement was also made that legislation would be introduced to reverse the legal advice.
Section 140A, Taxes Act 1988 applies where a beneficial interest in any shares is acquired by a person as a director or employee of any company and the interest is acquired on only conditional terms. In such cases, there is an income tax charge under Schedule E on any gain on the date the risk of transfer, reversion or forfeiture ceases or the employee sells the shares, if earlier. In addition, if under the terms on which the award is made there is a possibility that the risk of transfer, reversion or forfeiture may not cease for more than five years then an initial income tax charge under Schedule E will be applied on the gains at the date of the acquisition of the conditional shares. Where income tax is chargeable the employer must operate pay-as-you-earn (section 203FB(1), Taxes Act 1988) if the shares are readily convertible assets. National Insurance contributions are also payable.
My understanding is that section 140A, Taxes Act 1988 generally restores the position on conditional shares to what the Revenue had previously thought it to be – namely that a charge to tax on the award of a conditional interest in shares arises when the condition is lifted rather than when the share is awarded. This is what most commentaries on section 140A say.
But the legislation explicitly preserves any charge under section 135 on the acquisition of the conditional interest. This seems to mean that if an employee is given shares which are subject to risk of forfeiture, there will usually be no tax charge on acquisition; but that if he exercises an option to acquire shares subject to the same risk of forfeiture, there will be a tax charge. This seems a bizarre result – what have I missed?
(Query T15,731) – Confused of Tunbridge Wells.
Perhaps this will seem less bizarre on recollecting that sections 135 and 140A, Taxes Act 1988 treat two different, if often interrelated, assets. Shares and options are not the same thing. Section 140A covers shares received by a director or employee at an undervalue so as to prompt a benefit assessment. It provides that the benefit is only assessable when the shares vest unconditionally in him, or he contrives to sell them. If their vesting is subject to a condition, it must be satisfied, or he must sell the shares, before the assessment is made. There is an exception; if the condition will, or may, endure for five years or more, the benefit is assessed at once.
Section 135 covers options to acquire shares. The asset is not the shareholding, but the option to acquire it, and assessment occurs when the asset is dealt with, which can be by exercise, assignment, or release, and a gain results. If the option is capable of enduring for ten years or more, a benefit is assessed when it is granted, and the liability arising is regarded as on account of the liability on the overall gain, but with no repayment in the event of a loss.
In both cases, the benefit is computed as the market value of the asset less anything actually paid for it. – Canterbury.
Editorial note. Very few readers attempted an answer to this question. Hopefully the following paragraphs reproduced from Tolley's Practical Guide to Employees' Share Schemes by Colin Chamberlain (paragraphs 6.32 and 6.33) may provide some enlightenment, especially when coupled with recognition that common sense and tax have never been happy bed fellows.
Until 17 March 1998, the allocation of the beneficial interest in shares by a director or employee on conditional terms was in practice usually treated by the Inland Revenue as giving rise to income tax only at the date the interest in shares was no longer subject to any risk of transfer, reversion or forfeiture (generally known as 'vesting'). There appeared to be some authority for this approach in the case of Edwards v Roberts [1935] 19 TC 618 which involved employees who had contingent interests in a 'conditional fund' which vested after five years unless forfeited before the time and the court held that tax should apply at vesting rather than allocation of the contingent interests. Nevertheless, following the receipt of legal advice, an announcement was made in the Inland Revenue Tax Bulletin, June 1998, at page 545 that where shares had been 'acquired' beneficially by an employee subject to a risk of forfeiture that the proper tax treatment was that any discount was chargeable under the general principles of Schedule E at the date of the beneficial acquisition, and not when the risk of transfer, reversion or forfeiture ceased. An announcement was also made that legislation would be introduced to reverse the legal advice.
Section 140A, Taxes Act 1988 applies where a beneficial interest in any shares is acquired by a person as a director or employee of any company and the interest is acquired on only conditional terms. In such cases, there is an income tax charge under Schedule E on any gain on the date the risk of transfer, reversion or forfeiture ceases or the employee sells the shares, if earlier. In addition, if under the terms on which the award is made there is a possibility that the risk of transfer, reversion or forfeiture may not cease for more than five years then an initial income tax charge under Schedule E will be applied on the gains at the date of the acquisition of the conditional shares. Where income tax is chargeable the employer must operate pay-as-you-earn (section 203FB(1), Taxes Act 1988) if the shares are readily convertible assets. National Insurance contributions are also payable.
