ERSM30020 - Restricted Securities

Shares acquired before 26 October 1987

Acquisitions of shares made before 26 October 1987 are subject to the provisions of ICTA88/S138 (formerly FA72/S79).

If shares acquired before 26 October 1987 were still held by the person who acquired them, or by a connected person, on or after 26 October 1987, they may be affected by transitional provisions set out in FA88/S88.

Transitional provisions

The transitional provisions work as follows. They apply to acquisitions of shares made before 26 October 1987 which were not acquisitions of shares in a dependent subsidiary company but were made in pursuance of a right conferred, or of an opportunity offered, by reason of an office or employment.

They apply where the shares are subject to a growth-in-value charge to tax under   ICTA88/S138 (1)(a) (FA72/S79 (4)) after 26 October 1987.

They limit the growth-in-value charge to the difference between the value on acquisition and the value at 26 October 1987. If the value at 26 October 1987 is greater than the value at the date the charge arises, the lesser value is taken. For this purpose, value means market value as in ICTA88/S138.

Shares acquired before 26 October 1987 in a company which is not a dependent subsidiary may be subject to both

• a charge under ICTA88/S138 (1)(a) (a growth-in-value charge), and
• a charge under FA88/S78 (the post-acquisition charge) – see ERSM30030 onwards.

This is because Section 78 applies to shares acquired before 26 October 1987 just as it applies to shares acquired after that date.

Example

On 1 January 1986 Claire Rollinson acquires 100 shares in the company which employs him. The shares have a value of £500 at the acquisition date. They are subject to a restriction that does not apply to other shares of the same class, namely that they have no voting rights. Neither of the exemption conditions in Section 138 (3)(a)(i) or (ii) applies. On 1 January 2005 the restriction on voting rights is lifted. On 1 January 2007 the shares are granted preferential dividend rights.

The value of the shares changes as follows.

On 26 October 1987 it is £800

On 1 January 2005 after the lifting of the restriction on voting rights it is £1,100.

On 1 January 2007 the value is £1,200 before the granting of the preferential dividend rights and £1,500 thereafter.

The lifting of the voting restriction on 1 January 2005 triggers a growth-in-value charge under ICTA88 S138 (1)(a). This would be on £1,100-£500 = £600, were it not for the transitional provisions which limit the charge to £800-£500 = £300.

On 1 January 2007 there is a charge to tax under Section 78 in respect of the grant of preferential dividend rights. This is on £1,500-£1,200 = £300.

Differences in the definition of value for the purposes of FA88/S78 and FA72/S79 are ignored in the above example.

It would be possible for the charge under Section 78 to arise before the charge under ICTA88/S138.

The lifting of voting restrictions in the above example triggers the charge under ICTA88/S138 (1)(a). Such an event might also be a chargeable event for the purposes of ITEPA03/S449 (as originally enacted) – formerly FA88/S78. No attempt should be made to take a charge under both old and new provisions in respect of the same event. Only the charge under ICTA88/S138 (1)(a) should be taken in such circumstances. There can only ever be one charge under ICTA88/S138 (1)(a) in respect of a particular share acquisition.

Shares acquired before 26 October 1987 in a company, which is not a dependent subsidiary, are not subject to the charges to Income Tax under FA88/S79 or ICTA88/S80. Shares acquired in a dependent subsidiary before 26 October 1987 are not subject to the Income Tax charges in Sections 78, 79 or 80.

Where shares were acquired before 26 October 1987, ICTA88/S138 (1)(b), (formerly FA72/S79 (7)) provides for a special benefit charge broadly similar to that in FA88/S80.

Restriction where cessation lifted

If shares were acquired before 26 October 1987 the lifting of one particular type of restriction is not to be regarded as giving rise to a charge to tax under FA88/S78. This was the type of case where the lifting of a restriction was specifically exempted from triggering a charge under ICTA88/S138 (1)(a). This type of restriction took the form of any contract, agreement, arrangement, or condition which provided that when the employee left his employment the shares should be disposed of to a person nominated in accordance with the contract, agreement, arrangement or condition.