ERSM30510 – Restricted Securities

French FCPE (Fonds Comun de Placement d' Enterprise)

A French share scheme with particular tax advantages in France is often used for UK employees of a French-owned group. Known as FCPE (Fonds Commun de Placement d'Enterprise), the shares are restricted securities within Chapter 2.

There are two types of FCPE, leveraged and non-leveraged, and the precise tax treatment will depend on the arrangements entered into in the particular case. The following examples are illustrations of how the legislation will work in a typical scheme, but the actual liability may vary in an actual case.

Non-leveraged FCPE

• Market value of the shares at acquisition is £1.
• Shares purchased at 20% discount to the market value. (80p)
• The shares cannot be sold for a 5 year period. This reduces the market value to 75p.
• At the 5 year point, when the shares become unrestricted, their market value is £2.

On purchase of the shares there is no tax charge as the amount paid is greater than the restricted market value.

At the 5 year point there is a charge on the proportion of the market value not previously

charged to tax (20% of £2): £0.40.

Had an election been made to ignore the restrictions on the shares on subscription, income tax would have been due on the difference between the amount paid (80p) and the unrestricted market value (£1) - i.e. £0.20 - and nothing charged on the later occasion.

Leveraged FCPE

Employees are entitled to submit subscription forms during a "reservation period" during April and May 2003 (i.e. prior to the setting of the Subscription Price). Employees' subscriptions are, at this time, revocable.

Units in the FCPE may be acquired by employees making a payment (per unit) equal to the "Subscription Price" which will be at a 15% discount to the "Reference Price".

The Reference Price will be set at the average of the opening prices of A Ltd shares for the twenty trading days to 17 June 2003.

A Ltd will make a share issue directly to the FCPE at the "Subscription Price".

Following the setting of the Subscription Price, employees will have the opportunity to withdraw from their subscriptions during a four-day "revocation period". At the end of this period, subscriptions become irrevocable.

The FCPE will subscribe for new A Ltd shares, which will be funded partly by employees subscription monies and partly by monies acquired under a swap agreement entered into between the FCPE and a bank. The employees are treated as holding the shares. Under the swap agreement the bank will advance four times the amount of employees' subscription monies received by the FCPE. For each FCPE unit subscribed by employees, the FCPE will have acquired 5 A Ltd shares.

Employees must hold their shares during a lock-in period of 5 years (the "Retention Period"), and may only redeem them early in certain specified circumstances allowed under French law (which may be limited on a country-by-country basis).

As the shares cannot generally be disposed of for a period of 5 years from acquisition, they will constitute restricted securities for the purposes of Chapter 2 of Part 7.

Any difference between the initial restricted market value of a share and the Subscription Price will be "employment income" (i.e. "earnings" within the definition in Section 62). This amount will be subject to income tax and National Insurance contributions. This will be collected via PAYE.

In valuing the share, account will be taken of the restrictions on the share (for example, the potential, the lock-in provisions and the early release provisions).

On the removal of restrictions an income tax (and NICs) charge will arise on a proportion of the value of the share based on the amount of the discount which was not subject to income tax on subscription. The amount of this charge will be determined in accordance with the formula set out in Section 428(1).

Any further gain on the share (i.e. the difference between the consideration on disposal less the total of the initial subscription price paid and any amount on which income tax has been paid) may be subject to capital gains tax (CGT).

It will be possible for the employer and employee to enter into elections under Section 431(1) to disregard the restrictions. In such case the initial charge to tax will be on the full difference between the initial unrestricted market value of the share and the Subscription Price, and any gain on disposal would then be subject solely to CGT.

Example of leveraged FCPE

In the above example, had an election been made to ignore the restrictions on the shares, on subscription, income tax would have been due on the difference between the Subscription Price and the initial unrestricted market value (i.e. £1.20 - £0.85 = £0.35).

CGT would be due on the disposal consideration less the Subscription Price, less the amount on which income tax was due on subscription, less taper relief at 75% (i.e. £5.00 - £0.85 - £0.35 less 75% = £3.80 *(1-.75)% = 95p).