BIM44385 - Specific deductions - employee share schemes: Providing shares under FA03/SCH23 - other restricted shares: from 1/9/2003
Restricted shares fall into 2 main categories:
- forfeitable shares: these are shares which are subject to restrictions which may result in the employee having to forfeit the shares for less than their market value for reasons other than cessation of employment due to misconduct, see BIM44365;
- other restricted shares: for example where there are restrictions on:
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- rights conferred by the shares (such as restrictions on voting or rights to dividends), or
- the ability to sell or retain the shares (such as being prohibited from selling the shares for a fixed period).
From 1 September 2003 special rules in Part 4 of FA03/SCH23 (as amended by FA03/SCH22) apply to deductions in respect of other restricted shares acquired by employees on or after 16 April 2003.
Before 1 September 2003 Part 4 of FA03/SCH23 (as originally enacted) only applied to forfeitable shares and there were no special rules for other restricted shares.
From 1 September 2003
From 1 September 2003 deductions under FA03/SCH23 relating to other restricted shares acquired on or after 16 April 2003 are aligned with the timing and amounts on which the employee is chargeable to tax as employment income (or, for shares acquired through a tax-advantaged EMI option, would be chargeable but for an exemption from tax).
There are 3 categories of ‘relief-triggering’ events under FA03/SCH23 Part 4 (as amended by FA03/SCH22). The events, and the deductions given for the periods in which they occur, are:
Relief-triggering event |
Amount of deduction |
Acquisition of shares by employee |
The amount taxable as employment income in respect of the acquisition |
Lifting or variation of restrictions, or selling the shares with restrictions still attached |
The amount taxable as employment income under ITEPA03/S426 |
Death of employee while shares still subject to restrictions |
The amount which would have been taxable as employment income under ITEPA03/S426 if the shares had been sold (with restrictions attached) immediately before death |
Employment income tax charges
From 1 September 2003 the general rule is that there is an income tax charge in respect of the acquisition of the shares based on the market value of the shares at that time, taking into account the effect of the restrictions.
Elections (signed by employer and employee) may be made when the shares are acquired for income tax to be paid at that time, based on the value of the shares excluding the effect of the restrictions (ITEPA03/S431).
For shares acquired on or after 16 April 2003, each time a restriction is lifted or varied on or after 1 September 2003 there is an income tax (and NICs) charge based on the market value of the discount relating to that restriction. The discount relating to a restriction represents the proportion of the shares’ value that was not taxable on acquisition.
The amount chargeable to income tax is calculated using the same formula which applies to forfeitable shares, see BIM44365. An Excel-based calculator to help with the relevant income tax computations is available on request (by e-mail) from the Share Schemes Team, Capital & Savings, Somerset House.
Example
The example at BIM44390 explains the employment income tax charges, and related deductions under FA03/SCH23, which arise from 1 September 2003 in respect of other restricted shares.
