Income Tax (Earnings and Pensions) Act 2003

Introduction

422 Application of this Chapter

(1) This Chapter applies where—

(a) a person (“the employee”) acquires a beneficial interest in shares in a company as a director or employee of that or another company, and

(b) the interest is acquired on terms that make it only conditional.

(2) In this Chapter—

• “the employee’s interest” means the beneficial interest in shares acquired by the employee as mentioned in subsection (1);

• “the employer company” means the company as a director or employee of which the employee’s interest is acquired;

• “the shares” means the shares mentioned in subsection (1)(a);

and “director” and “employee” have the extended meaning given by section 434(1).

423 Interests in shares acquired “as a director or employee”

(1) For the purposes of this Chapter a person (“E”) acquires an interest in shares “as a director or employee” of a company if E acquires the interest in pursuance of—

(a) a right conferred on, or opportunity offered to, E by reason of E’s office or employment as a director or employee of the company;

(b) a right or opportunity assigned to E, having been conferred on or offered to some other person by reason of E’s office or employment as a director or employee of the company; or

(c) an assignment, the interest having been acquired by some other person by reason of E’s office or employment as a director or employee of the company.

(2) The references in subsection (1) to a right or opportunity conferred or offered by reason of E’s office or employment include—

(a) one so conferred or offered after E has ceased to hold the office or employment, and

(b) one that arises from the fact that shares—

(i) which E acquired as a director or employee (or is treated as so acquiring by virtue of this paragraph), or

(ii) in which E so acquired an interest,

were convertible shares.

(3) A person who—

(a) has acquired an interest in shares which is only conditional, convertible shares or an interest in convertible shares,

(b) acquired that interest or those shares as a director or employee of a company, or is treated by virtue of this subsection as having done so, and

(c) as a result of any two or more transactions—

(i) ceases to be entitled to that interest or those shares, and

(ii) becomes entitled to another interest in shares which is only conditional or to any convertible shares or to an interest in convertible shares,

is to be treated for the purposes of this Chapter as if the interest or shares mentioned in paragraph (c)(ii) were also acquired as a director or employee of the company.

(4) Subsection (3) also applies where the interest or shares mentioned in subsection (3)(c)(ii) were acquired by a person connected with the first-mentioned person.

(5) Nothing in subsection (3) or (4) affects the rights or opportunities included by virtue of subsection (2)(b).

(6) In this section “convertible shares” has the same meaning as in Chapter 3 of this Part (convertible shares) (see section 435(2) and the definition of shares in section 446(1)).

424 Meaning of interest being “only conditional”

(1) For the purposes of this Chapter an interest in shares is “only conditional” for so long as the terms on which the person is entitled to it—

(a) provide that if certain circumstances arise, or do not arise, there will be a transfer, reversion or forfeiture as a result of which that person will cease to be entitled to any beneficial interest in the shares, and

(b) are not such that, on the transfer, reversion or forfeiture, that person will be entitled to receive in respect of the interest an amount that is equal to or more than its market value at that time.

(2) But a person is not to be regarded as having an interest in shares which is only conditional by reason only that one or more of the following is the case—

(a) the shares are unpaid or partly paid and may be forfeited for non-payment of calls, in a case where there is no restriction on the meeting of calls by that person;

(b) the articles of association of the company require the shares to be offered for sale or transferred, if that person ceases to hold a relevant office or employment;

(c) that person may be required to offer the shares for sale or transfer them on ceasing, as a result of misconduct, to hold a relevant office or employment;

(d) in the case of an interest in a security, the security may be redeemed on payment of any amount.

(3) In subsection (1)(a) the references, in relation to the terms of a person’s entitlement, to circumstances arising include references to—

(a) the expiry of a period specified in or determined under those terms,

(b) the death of that or any other person, and

(c) the exercise by any person of a power conferred on that person by or under those terms.

(4) For the purposes of subsection (1)(b) the market value of the interest is to be determined as if there were no provision for transfer, reversion or forfeiture.

(5) In subsection (2)(b) “articles of association” includes, in the case of a company incorporated under the law of a country outside the United Kingdom, any equivalent document relating to the company.

(6) The references in subsection (2)(b) and (c) to a person ceasing to hold a relevant office or employment are to that person ceasing to be an officer or employee of the company in question, or of one or more group companies or of any group company.

(7) For the purposes of subsection (6)—

(a) a company is a “group company” in relation to another company if they are members of the same group, and

(b) companies are taken to be members of the same group if, and only if, one is a 51% subsidiary of the other or both are 51% subsidiaries of a third company.

425 Cases where this Chapter does not apply

(1) This Chapter does not apply where a person acquires a beneficial interest in shares as a director or employee of a company if the earnings from the office or employment in question were not (or would not have been if there had been any) general earnings to which section 15 or 21 applies (earnings for year when employee resident and ordinarily resident in the UK).

(2) This Chapter does not apply by virtue of section 423(2)(a) (right or opportunity conferred or offered after person has ceased to hold office or employment) if it would not apply if the right or opportunity had been conferred or offered in the last tax year in which the office or employment was held.