Share Scheme Manual - SSM12.11

Shares acquired by employees: transitional provisions

The transitional provisions work as follows.

• They apply to acquisitions of shares made before 26 October 1987 which

but

• 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

and

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 an employee 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 1989 the restriction on voting rights is lifted. On 1 January 1991 the shares are granted preferential voting rights.

The value of the shares changes as follows.

On 26 October 1987 it is £800.

On 1 January 1989 after the lifting of the restriction on voting rights it is £1,100.

On 1 January 1991 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 1989 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 1991 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 Section 78. 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.