Restricted securities may be exchanged in the circumstances of a
take-over or a reorganisation of capital.
How they are dealt with depends on whether the
“old” securities were acquired before or on/after 16th
April 2003, and in respect of the latter category whether an
election has been made. The following analysis assumes that like
value is received (i.e
. AMV and
UMV of old shares equals
AMV and
UMV of new shares). Where greater value is
received than the old restricted shares were worth, consideration
needs to be given to whether:
Some situations where a complete class of share is exchanged and either:
may result in exemption on disposal by virtue of ITEPA03/S429 (case outside charge under section 426).
The disposal of the old securities will create a chargeable
event under ITEPA03/S427 (3)(c) and, to the extent that the value
of OP has wasted due to the effluxion of time, there will be a
charge to tax under section 428. This will then be reflected in a
reduced charge on the restrictions being lifted from the new
securities. This can best be illustrated with an example, ignoring
any commercial increase in share value.
Example 1
Say a 5-year restriction on sale is imposed on shares with
unrestricted value of £100, thus reducing their actual MV to
£75, and Peter Meehan pays £75. Assume too a
straight-line reduction in the effect of the restriction. After
three years there is an exchange on a take-over of like-for-like
restricted shares. Thus at year 3 there will be a Chapter 2 charge
on:
UMV x (IUP - PCP - OP) - CE) = £100 x (0.25 - 0 - 0.1)
- 0 = £15
followed at the end of year 5, when the restriction on the
replacement share finally lifts, by a charge on:
UMV x (IUP - PCP - OP) - CE) = £100 x (0.1 - 0 - 0) -
0 = £10
Where an election has already been made for the old securities
then ITEPA03/S431 (1) states that sections 425 to 430 are not to
apply to the securities and for ‘relevant tax purposes’
(including Chapter 1 Part 3 and Chapter 3C Part 7) the market value
is calculated as if they were not restricted. So in the
ITEPA03/S428 (3) formula for IUP, DA (unrestricted value of old
securities) will equal IUMV (unrestricted value of new securities)
giving a value of nil. There can be no charge.
It should be noted that, where the exchange is not of
like-for-like, the value of the new restricted securities could be
much greater than what has been given up. In those circumstances
there may well be a further charge, and a scenario for which
another section 431 election should be considered.
The disposal of conditional shares (acquired pre-16/4/03) will
create a charge under the original Chapter 2 provisions of ITEPA
(previously section 140A ICTA 1988). The new restricted securities
acquired will be dealt with in the normal way, so that on lifting
of the restrictions there is likely to be a charge under the new
Chapter 2 (restricted securities). Such a charge may be obviated by
an election under ITEPA03/S431 (1), although that is likely to lead
to an acquisition charge.
Example 2
Kevin Guerra is awarded 1,000 conditional shares in Alpha Ltd
on 1 June 2002, forfeitable if he leaves his employment within 4
years. On 31 May 2005 there is a take-over and he exchanges his
shares in Alpha Ltd for 1,000 shares in Beta Ltd, subject to
potential forfeiture for the remaining year. Each share in Beta Ltd
is worth £5 unrestricted, but the forfeiture condition reduces
its value to £4.40. On 31 May 2006 each share is worth £6
when the condition of forfeiture is lifted.
In 2002/3 there is no charge on acquisition of conditional
shares.
In 2005/6 Guerra has disposed of conditional shares for
consideration of £4,400 (£4.40 x 1,000) so must pay tax
on this computed under ITEPA03/S428 as originally enacted see
ERSM30230. Smith has now acquired a
restricted security within the new legislation.
In 2006/7 Guerra will be liable under ITEPA03/S428 on the
lifting of the restriction using the formula on the unrestricted
value of shares, now £6 x 1,000 = £6,000:
UMV x (IUP – PCP – OP) – CE or £6,000
x (0.12 – 0 – 0) – 0 = £720 see
ERSM30400
The roll-over provisions for company reorganisations as set out
in ITEPA03/S462 (as originally enacted), which applies TCGA92/S127,
continue to apply the old Chapter 4 charge to the replacement
shares, per paragraph 9(4) Schedule 22 FA 2003. Section 127 TCGA
1992 deems the new holding to be the same asset as the original
shareholding. So if a restriction is lifted the old rules under the
original Chapter 4 charge on restricted securities apply.
Example 3
Ian Parker is awarded 1,000 conditional shares in Gamma Ltd
on 1 June 2002, with a 4 years restriction on sale. On 31 May 2005
there is a take-over and she exchanges her shares in Gamma Ltd for
1,000 shares in Delta Ltd, subject to a restriction on sale for the
remaining year. Each share in Gamma Ltd was worth unrestricted
£4 on acquisition, reduced by the restriction to £3. Each
share in Delta Ltd is worth £5 unrestricted, but the no sale
restriction reduces its value to £4.75. On 31 May 2006 each
share is worth £6 when the sale restriction is lifted.
In 2002/3 there is a money’s worth charge on
acquisition of restricted shares equal to their value of
£3,000 (£3 x 1,000).
In 2005/6 Parker has disposed of restricted shares for
consideration of other restricted shares. The new shares in Delta
Ltd are treated as if they had been acquired on 1 June 2002. There
is no chargeable event.
In 2006/7 the restriction lifts, but there uplift in value
from immediately before lifting to immediately after lifting is
negligible; so no charge – see
ERSM30030.
