The following examples illustrate the charges under FA88/S79.
On 1 January 1993 an employee acquires 500 shares in a company
which is a dependent subsidiary company. Their cost (and their
value) is £2 per share.
200 shares are sold on 1 June 1996 but the remainder are not
sold until 31 March 2003.
The value of the shares on 1 June 1996 is £5 per share
and on 31 December 1999 (7 years after acquisition) it is £10
per share.
There are two charges to tax under Schedule E
Once the seven-year period has passed there can be no further charge to Income Tax in respect of these shares.
On 1 January 1993 an employee acquires 500 shares in an
independent company at a cost of £2 per share.
On 1 April 1995 the company becomes a dependent subsidiary
company.
On 1 June 1998 the employee sells 200 shares. The employee
does not sell the remainder of the shares until the 31 March 2003.
The value of the shares at 1 April 1995 was £3 per
share. At 1 June 1998 it was £5 per share, and at 31 March
2002 (7 years after the company became a dependent subsidiary) it
was £4 per share.
There are two charges to tax under Schedule E:
On 1 January 1993 an employee acquires 500 shares in an
independent company at a cost of £2 per share.
On 1 April 1995 the company becomes a dependent subsidiary
company.
On 1 June 1998 the employee sells 200 shares.
On 1 September 2000 the company ceases to be a dependent
subsidiary. The employee does not sell the remainder of the shares
until 31 March 2003.
The value of the shares at 1 April 1995 was £3 per
share. At 1 June 1998 it was £5 per share and at 1 September
2000 it was £7 per share. (1 September 2000 is the start of a
new accounting period, the company having changed its accounting
date some time after 1 April 1995.)
There are two charges to tax under Schedule E
It is important to note, in respect of both Example 2 and
Example 3, that further charges to Income Tax might occur in
respect of these shares if or when the company becomes an
independent company again. This is because the post-acquisition
charge applies to shares which were acquired in an independent
company at any time when that company is an independent company.
In Example 1, however, the shares on acquisition were shares
in a dependent subsidiary company, and such shares can never be
subject to the post-acquisition charge. They remain subject to the
growth-in-value charge for the 7 years from acquisition even if the
company becomes an independent company within that period.
On 1 January 1997 an employee acquires 500 shares in a company
which is a dependent subsidiary company. Their cost (and their
value) is £2 per share.
200 shares are sold on 1 June 2000 but the remainder are not
sold until the 31 March 2005.
The value of the shares on 1 June 2000 is £5 per share
and on 31 December 2003 (7 years after acquisition) is £10 per
share.
The increase in value of the shares is caused by a favourable
contract with the parent company on a non-arm’s length basis.
The value of the shares as at 16 April 2003 is £9, at 5 April
2004 £11 and at 31 March 2005 £13.
The first charge to tax under Schedule E is in the year of
sale
Under the old dependent subsidiary legislation there would have
been a charge at the 7-year point on £2,400 (£3,000
– £600), but the legislation had been repealed by then.
However, as the increase in value is caused by a thing done
otherwise than for genuine commercial purposes (the non-arms length
transactions), Chapter 3B will apply to the shares, deemed to have
been acquired at 16 April 2003. The charge for the first relevant
period (16/4/03 – 5/4/04) will be:
The charge for the second and final relevant period (6/4/04 – 31/3/05) will be:
