BIM44400 - Specific deductions - employee share schemes: Providing shares under FA03/SCH23 - convertible shares from 1/9/2003

Special rules in Part 4A of FA03/SCH23 apply from 1 September 2003 if employees acquire qualifying shares which are:

• Convertible into other shares or securities, or
• Acquired on conversion from other shares or securities.

Part 4A reflects changes to employment income tax charges in respect of convertible shares and securities introduced from 1 September 2003 by FA03/SCH22.

From 1 September 2003

From 1 September 2003 deductions under FA03/SCH23 are given:

• When employees acquire qualifying shares which are convertible (into other qualifying shares or into other shares or securities).
• When employees acquire qualifying shares under existing conversion rights (on conversion from other qualifying shares or from other shares or securities).

The amount allowed as a deduction in each of these ‘relief-triggering events’ is the amount taxable as employment income as a result of the event (or, for shares acquired through a tax-advantaged EMI option, would be chargeable but for an exemption from tax).

The most common situation covered by the new rules is likely to be employees’ acquisitions of convertible loan stock that has a right to convert into qualifying shares. No deduction is given by FA03/SCH23 when the employees acquire the loan stock. When the loan stock is converted into qualifying shares a deduction is given for the amount treated as employment income as a result of the conversion.

Income tax charges

From 1 September 2003 the income tax treatment reflects the reality that the employee is acquiring two assets - a share or security plus a right to convert it into another share or security. Income tax charges arise when the employee:

• acquires the share or security, ignoring the right to convert;
• converts the share or security into other shares or securities in accordance with the existing conversion rights.

On the acquisition of convertible shares or securities income tax is charged on what would be their market value at that time if they were not convertible.

Later, on conversion, the employee is taxed as if an option had been exercised, with the market value of the convertible shares or securities given up being treated as consideration for the new shares or securities acquired.

Examples

Examples of how to compute income tax charges in respect of convertible shares or securities on or after 1 September 2003, and therefore the amount of the deduction given to the employing company under FA03/SCH23, are at BIM44405.