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Income Tax (Earnings and Pensions) Act 2003

Type Public General Act

Publication 2003-03-06

Last updated 2026-03-15

State In force

Department Statute Law Database

Source legislation.gov.uk

articles Not indexed

Reform history JSON API

(1) For the purpose of determining any liability to tax arising by virtue of the SIP code in respect of any of a participant’s shares ceasing to be subject to the plan—

(a) shares are to be taken as ceasing to be subject to the plan in the order in which they were awarded to the participant under the plan, and

(b) where shares are awarded to the participant on the same day, the shares are to be treated as ceasing to be subject to the plan in the order which gives rise to the lowest charge to income tax on the participant.

(2) For the purposes of subsection (1) dividend shares are “awarded” to a participant when the trustees acquire them on behalf of, or appropriate them to, the participant.

PAYE

Modification of section 696 where charge on shares ceasing to be subject to plan

509

(1) Where—

(a) as a result of shares ceasing to be subject to a Schedule 2 SIP, there is an amount that counts as employment income of a participant by virtue of the SIP code, and

(b) the shares are readily convertible assets,

section 696 (readily convertible assets) applies as follows.

(2) Section 696 applies as if the participant (“P”) were being provided with PAYE income in the form of those shares—

(a) at the time when the shares cease to be subject to the plan, and

(b) in respect of the relevant employment in which P is employed at that time (or, if P is not then employed in relevant employment, the relevant employment in which P was last employed before that time).

(3) In addition, subsection (2) of section 696 applies as if the reference in that subsection to the amount of income likely to be PAYE income in respect of the provision of the asset were a reference to the amount which is likely to count as employment income by virtue of the SIP code as a result of the shares ceasing to be subject to the plan.

(4) In this section “readily convertible asset” has the same meaning as in section 696 (see sections 701 and 702), but this is subject to subsections (5) and (6).

(5) In determining for the purposes of this section (and of section 696 in its application in accordance with this section) whether the shares are readily convertible assets, any market for the shares which—

(a) is created by virtue of the trustees acquiring shares for the purposes of the plan, and

(b) exists solely for the purposes of the plan,

is to be disregarded.

(6) In determining for the purposes of this section (and of section 696 in its application in accordance with this section) whether the shares are readily convertible assets, section 702 has effect with the omission of subsections (5A) to (5D).

Payments by trustees to employer company on shares ceasing to be subject to plan

510

(1) This section applies if, as a result of any shares (“the relevant shares”) ceasing to be subject to a Schedule 2 SIP—

(a) there is an amount that counts as employment income of a participant by virtue of the SIP code, and

(b) an obligation to make a PAYE deduction arises in respect of that amount.

(2) The trustees must pay to the employer company a sum which is sufficient to enable the employer company to discharge that obligation.

(3) Subsection (2) is subject to—

(a) subsection (4), and

(b) section 511 (PAYE deductions to be made by trustees on shares ceasing to be subject to plan).

(4) Subsection (2) only applies if, or to the extent that, the plan does not require the participant to pay the employer company a sum which is sufficient to discharge the obligation mentioned in subsection (1)(b).

(5) Section 710(1) (notional payments: accounting for tax) has effect as if it required the deduction of income tax to be made from any sum or sums received by the employer company—

(a) from the trustees under subsection (2), or

(b) from the participant in accordance with a requirement of the plan, as mentioned in subsection (4).

(6) After making the necessary PAYE deduction from the sum or sums received as mentioned in subsection (5), the employer company must pay any remaining amount to the participant.

(7) In this section “the employer company” means—

(a) the company which employs the participant in relevant employment at the time when the relevant shares cease to be subject to the plan, or

(b) if the participant is not then employed in relevant employment, the company which last employed the participant in relevant employment before that time,

so long as that company is one to which PAYE regulations apply at that time.

PAYE deductions to be made by trustees on shares ceasing to be subject to plan

511

(1) This section applies if, as a result of any shares ceasing to be subject to a Schedule 2 SIP—

(a) there is an amount that counts as employment income of a participant by virtue of the SIP code, and

(b) condition A or B is met.

(2) Condition A is that an officer of Revenue and Customs —

(a) is of the opinion that it is impracticable for the employer company (within the meaning of section 510) to make a PAYE deduction, and

(b) accordingly directs that this section is to apply.

(3) Condition B is that there is no company that qualifies as the employer company (within the meaning of that section).

(4) If this section applies—

(a) section 510(2) does not apply, and

(b) the trustees must make a PAYE deduction in respect of the taxable equivalent as if the participant were a former employee of the trustees.

(5) The “taxable equivalent” means an amount equal to that mentioned in subsection (1).

(6) If this section applies, section 689 (employee of non-UK employer) does not apply.

Disposal of beneficial interest by participant

512

(1) This section applies if—

(a) a participant (“P”) disposes of P’s beneficial interest in any of P’s plan shares to the trustees, and

(b) the trustees are, as a result of paragraph 6 of Schedule 7D to TCGA 1992 (deemed disposal by trustees on disposal of beneficial interest), treated as having disposed of the shares in question.

(2) If this section applies, sections 510 and 511 apply as if the consideration payable by the trustees to the participant on the disposal had been received by the trustees as the proceeds of disposal of plan shares.

Capital receipts: payments by trustees to employer company

513

(1) This section applies if the trustees receive a sum of money which constitutes (or forms part of) a capital receipt which, by virtue of the SIP code, counts as employment income of a participant when it is received by the participant.

(2) Out of that sum of money the trustees must pay to the employer company an amount equal to the amount of employment income.

(3) The employer company must then pay over that amount to the participant, but when doing so must make a PAYE deduction.

(4) This section is subject to section 514 (capital receipts: deductions to be made by trustees).

(5) In this section “the employer company” means—

(a) the company which employs the participant in relevant employment at the time when the trustees receive the sum mentioned in subsection (1), or

(b) if the participant is not then employed in relevant employment, the company which last employed the participant in relevant employment before that time,

so long as that company is one to which PAYE regulations apply at that time.

Capital receipts: PAYE deductions to be made by trustees

514

(1) This section applies if—

(a) the trustees receive a sum of money which constitutes (or forms part of) a capital receipt which, by virtue of the SIP code, counts as employment income of a participant when it is received by the participant, and

(b) either condition A or B is met.

(2) Condition A is that an officer of Revenue and Customs —

(a) is of the opinion that it is impracticable for the employer company (within the meaning of section 513) to make a PAYE deduction, and

(b) accordingly directs that this section is to apply.

(3) Condition B is that there is no company that qualifies as the employer company (within the meaning of that section).

(4) If this section applies, the trustees must, when paying the capital receipt over to the participant, make a PAYE deduction in respect of the taxable equivalent as if the participant were a former employee of the trustees.

(5) The “taxable equivalent” means an amount equal to the amount which counts as employment income as mentioned in subsection (1)(a).

(6) If this section applies, section 689 (employee of non-UK employer) does not apply.

Other tax consequences

Tax advantages and charges under other Acts

515

(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) SIPs are also dealt with in—

(a) Part 1 of Schedule 7D to TCGA 1992 (which provides for relief from capital gains tax for the trustees and for participants in relation to a Schedule 2 SIP in certain circumstances, including where shares cease to be subject to the plan), ...

(b) section 95 of FA 2001 (which contains relief from stamp duty and stamp duty reserve tax for transfers of partnership or dividend shares) , ...

(c) sections 392 to 395 and 405 to 408 of ITTOIA 2005 (SIPs: special rules for charges under Chapters 3 and 4 of Part 4 of that Act (dividends etc. from UK or non-UK resident companies etc.)) and section 770 of that Act (exemption for amounts applied by SIP trustees acquiring dividend shares or retained for reinvestment), ...

(d) Chapter 5 of Part 9 of ITA 2007 (which provides for section 479 of that Act not to apply to income of the trustees of a Schedule 2 SIP in certain circumstances), and

(e) Chapter 1 of Part 11 of CTA 2009 (share incentive plans)

(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 7 — ... SAYE option schemes

Introduction

Approved SAYE option schemes

516

(1) This Chapter provides—

(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) for exemptions from income tax in connection with share options granted under SAYE option schemes which are Schedule 3 SAYE option schemes.

(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) The provisions of—

(a) this and the following sections of this Chapter,

(b) Schedule 3, and

together constitute “the SAYE code”.

(4) In the SAYE code—

“SAYE option scheme” means a scheme (commonly referred to as an SAYE share option scheme) which is established by a company and provides—for share options to be granted to employees and directors, andfor the shares acquired by the exercise of the share options to be paid for in the way mentioned in paragraph 24 of Schedule 3 (payments for shares to be linked to approved savings arrangements);

“Schedule 3 SAYE option scheme” is to be read in accordance with paragraph 1 and Part 8 of Schedule 3;

“share option” means a right to acquire shares in a company;

“shares” includes stock.

(5) Other expressions used in the SAYE code and contained in the index at the end of Schedule 3 have the meaning indicated by the index.

517

(1) This Chapter applies to a share option granted to an individual—

(a) in accordance with the provisions of a Schedule 3 SAYE option scheme, and

(b) by reason of the individual’s office or employment as a director or employee of a company.

(2) The individual may be a director or employee of the company whose shares are the subject of the share option, or of some other company.

Tax advantages

No charge in respect of receipt of option

518

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

No charge in respect of exercise of option

519

(1) No liability to income tax arises in respect of the exercise of the share option if—

(a) the individual exercises it in accordance with the provisions of the SAYE option scheme at a time when the scheme is a Schedule 3 SAYE option scheme, ...

(b) condition A or B is met and

(c) the avoidance of tax or national insurance contributions is not the main purpose (or one of the main purposes) of any arrangements under which the option was granted or is exercised.

(2) Condition A is that the option is exercised on or after the third anniversary of the date on which it was granted.

(3) Condition B is that the option—

(a) is exercised before the third anniversary of the date on which it was granted, and

(b) is so exercised otherwise than by virtue of a provision included in the scheme under—

paragraph 34(5) of Schedule 3 (exercise of option where scheme-related employment ends), or

paragraph 37 of that Schedule (exercise of option where certain company events occur).

(3A) In relation to any shares acquired by the exercise of the share option, no liability to income tax arises in respect of its exercise if—

(a) the individual exercises the option before the third anniversary of the date on which the option was granted at a time when the SAYE option scheme is a Schedule 3 SAYE option scheme,

(b) the option is exercised by virtue of a provision included in the scheme—

(i) under paragraph 37(1) of Schedule 3 where the relevant date is the relevant date for the purposes of paragraph 37(2), (4) or (4A), or

(ii) under paragraph 37(6) of Schedule 3,

(i) the general offer,

(ii) the compromise or arrangement, ...

(iia) the non-UK company reorganisation arrangement, or

(iii) the takeover offer,

the individual receives cash (and no other assets) in exchange for the shares,

(d) when the decision to grant the option was taken—

(i) the general offer,

(ii) the compromise or arrangement, ...

(iia) the non-UK company reorganisation arrangement, or

(iii) the takeover offer,

as the case may be, had not been made,

(e) when that decision was taken, no arrangements were in place or under consideration for—

(i) the making of a general offer which would fall within subsection (3D),

(ii) the making of any compromise or arrangement which would fall within subsection (3H), ...

(iia) the making of any non-UK company reorganisation arrangement which would fall within subsection (3H), or

(iii) the making of a takeover offer (as defined in section 974 of the Companies Act 2006) which would fall within subsection (3I),

(f) if the scheme includes a provision under paragraph 38 of Schedule 3 (“the paragraph 38 provision”), in connection with—

(i) the general offer,

(ii) the compromise or arrangement, ...

(iia) the non-UK company reorganisation arrangement, or

(iii) the takeover offer,

as the case may be, no course of action was open to the individual which, had it been followed, would have resulted in the individual making an agreement under the paragraph 38 provision which would have prevented the individual from acquiring the shares by the exercise of the option, and

(g) the avoidance of tax or national insurance contributions is not the main purpose (or one of the main purposes) of any arrangements under which the option was granted or is exercised.

(3B) In subsection (3A)(c)(iii), (d)(iii) and (f)(iii) “the takeover offer” means the takeover offer (as defined in section 974 of the Companies Act 2006) giving rise to the application of sections 979 to 982 or 983 to 985 of that Act.

(3C) In subsection (3A)(e) “arrangements” includes any plan, scheme, agreement or understanding, whether or not legally enforceable.

(3D) A general offer falls within this subsection if it is—

(a) a general offer to acquire the whole of the issued ordinary share capital of the relevant company which is made on a condition such that, if it is met, the person making the offer will have control of the relevant company, or

(b) a general offer to acquire all the shares in the relevant company which are of the same class as those acquired by the exercise of the option.

(3E) In subsection (3D)(a) the reference to the issued ordinary share capital of the relevant company does not include any capital already held by the person making the offer or a person connected with that person and in subsection (3D)(b) the reference to the shares in the relevant company does not include any shares already held by the person making the offer or a person connected with that person.

(3F) For the purposes of subsection (3D)(a) and (b) it does not matter if the general offer is made to different shareholders by different means.

(3G) For the purposes of subsection (3D)(a) a person is to be treated as obtaining control of a company if that person and others acting in concert together obtain control of it.

(3H) A compromise or arrangement or a non-UK company reorganisation arrangement falls within this subsection if it is applicable to or affects—

(a) all the ordinary share capital of the relevant company or all the shares of the same class as those acquired by the exercise of the option, or

(b) all the shares, or all the shares of that same class, which are held by a class of shareholders identified otherwise than by reference to their employment or directorships or their participation in a Schedule 3 SAYE option scheme.

(3I) A takeover offer falls within this subsection if—

(a) it relates to the relevant company, and

(b) where there is more than one class of share in the relevant company, the class or classes to which it relates is or include the class of the shares acquired by the exercise of the option.

(3J) In subsections (3D), (3H) and (3I) “the relevant company” means the company whose shares are acquired by the exercise of the option.

(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) In Schedule 3—

(a) paragraph 32 provides for the exercise of an option where the holder has died, and

(b) paragraphs 40H(4) and 40I(9) provide for an SAYE option scheme to be treated as a Schedule 3 SAYE option scheme at the time when an option is exercised even though the scheme is not a Schedule 3 SAYE option scheme.

No charge in respect of post-acquisition benefits

520

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 8 — ... CSOP schemes

Introduction

Approved CSOP schemes

521

(1) This Chapter provides—

(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) for exemptions from income tax in connection with share options granted under CSOP schemes which are Schedule 4 CSOP schemes, and

(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) The provisions of—

(a) this and the following sections of this Chapter,

(b) Schedule 4, and

together constitute “the CSOP code”.

(4) In the CSOP code—

“CSOP scheme” means a scheme (commonly referred to as a company share option plan) which—is established by a company,provides for share options to be granted to employees and directors, andis not an SAYE option scheme (within the meaning of the SAYE code: see section 516(4));

“Schedule 4 CSOP scheme” is to be read in accordance with paragraph 1 and Part 7 of Schedule 4;

“share option” means a right to acquire shares in a company;

“shares” includes stock.

(5) Other expressions used in the CSOP code and contained in the index at the end of Schedule 4 have the meaning indicated by the index.

522

(1) This Chapter applies to a share option granted to an individual—

(a) in accordance with the provisions of a Schedule 4 CSOP scheme, and

(b) by reason of the individual’s office or employment as a director or employee of a company.

(2) The individual may be a director or employee of the company whose shares are the subject of the share option, or of some other company.

Tax advantages

No charge in respect of receipt of option

523

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

No charge in respect of receipt of option

524

(1) No liability to income tax arises in respect of the exercise of the share option if—

(a) the individual exercises it in accordance with the provisions of the CSOP scheme at a time when the scheme is a Schedule 4 CSOP scheme, ...

(b) Condition A or B is met and

(c) the avoidance of tax or national insurance contributions is not the main purpose (or one of the main purposes) of any arrangements under which the option was granted or is exercised.

(2) Condition A is that the option is exercised—

(a) on or after the third anniversary of the date on which it was granted, but

(b) not later than the tenth anniversary of that date.

(2A) Condition B is that the option—

(a) is exercised before the third anniversary of the date on which it was granted, and

(b) is so exercised by virtue of a provision included in the scheme under paragraph 24 of Schedule 4 (exercise of options after ceasing to be director or employee) in circumstances in which subsection (2B) applies.

(2B) This subsection applies if the individual exercising the option—

(a) has ceased to be in qualifying employment because of—

(i) injury, disability, redundancy or retirement,

(ii) a relevant transfer within the meaning of the Transfer of Undertakings (Protection of Employment) Regulations 2006, or

(iii) in the case of a group scheme where the qualifying employment is as a director or employee of a constituent company, that company ceasing to be controlled by the scheme organiser, and

(b) exercises the option within 6 months of the day on which he ceases to be such a director or employee.

(2BA) For the purposes of subsection (2B) an individual is in “qualifying employment” if the individual is a full-time director or qualifying employee (as defined in paragraph 8(2) of Schedule 4) of—

(a) the scheme organiser, or

(b) in the case of a group scheme, a constituent company.

(2C) In subsection (2B)(a)(i) —

“redundancy” means redundancy within the meaning of ERA 1996 or ER(NI)O 1996,

...

(2D) Subsection (2B)(a)(iii) does not cover a case where the constituent company was controlled by the scheme organiser by virtue of paragraph 34 of Schedule 4 (jointly owned companies).

(2E) In relation to any shares acquired by the exercise of the share option, no liability to income tax arises in respect of its exercise if—

(a) the individual exercises the option before the third anniversary of the date on which the option was granted at a time when the CSOP scheme is a Schedule 4 CSOP scheme,

(b) the option is exercised by virtue of a provision included in the scheme under paragraph 25A of Schedule 4,

(i) the general offer,

(ii) the compromise or arrangement, ...

(iia) the non-UK company reorganisation arrangement, or

(iii) the takeover offer,

the individual receives cash (and no other assets) in exchange for the shares,

(d) when the decision to grant the option was taken—

(i) the general offer,

(ii) the compromise or arrangement, ...

(iia) the non-UK company reorganisation arrangement, or

(iii) the takeover offer,

as the case may be, had not been made,

(e) when that decision was taken, no arrangements were in place or under consideration for—

(i) the making of a general offer which would fall within subsection (2H),

(ii) the making of any compromise or arrangement which would fall within subsection (2L), ...

(iia) the making of any non-UK company reorganisation arrangement which would fall within subsection (2L), or

(iii) the making of a takeover offer (as defined in section 974 of the Companies Act 2006) which would fall within subsection (2M),

(f) if the scheme includes a provision under paragraph 26 of Schedule 4 (“the paragraph 26 provision”), in connection with—

(i) the general offer,

(ii) the compromise or arrangement, ...

(iia) the non-UK company reorganisation arrangement, or

(iii) the takeover offer,

as the case may be, no course of action was open to the individual which, had it been followed, would have resulted in the individual making an agreement under the paragraph 26 provision which would have prevented the individual from acquiring the shares by the exercise of the option, and

(g) the avoidance of tax or national insurance contributions is not the main purpose (or one of the main purposes) of any arrangements under which the option was granted or is exercised.

(2F) In subsection (2E)(c)(iii), (d)(iii) and (f)(iii) “the takeover offer” means the takeover offer (as defined in section 974 of the Companies Act 2006) giving rise to the application of sections 979 to 982 or 983 to 985 of that Act.

(2G) In subsection (2E)(e) “arrangements” includes any plan, scheme, agreement or understanding, whether or not legally enforceable.

(2H) A general offer falls within this subsection if it is—

(a) a general offer to acquire the whole of the issued ordinary share capital of the relevant company which is made on a condition such that, if it is met, the person making the offer will have control of the relevant company, or

(b) a general offer to acquire all the shares in the relevant company which are of the same class as those acquired by the exercise of the option.

(2I) In subsection (2H)(a) the reference to the issued ordinary share capital of the relevant company does not include any capital already held by the person making the offer or a person connected with that person and in subsection (2H)(b) the reference to the shares in the relevant company does not include any shares already held by the person making the offer or a person connected with that person.

(2J) For the purposes of subsection (2H)(a) and (b) it does not matter if the general offer is made to different shareholders by different means.

(2K) For the purposes of subsection (2H)(a) a person is to be treated as obtaining control of a company if that person and others acting in concert together obtain control of it.

(2L) A compromise or arrangement or a non-UK company reorganisation arrangement falls within this subsection if it is applicable to or affects—

(a) all the ordinary share capital of the relevant company or all the shares of the same class as those acquired by the exercise of the option, or

(b) all the shares, or all the shares of that same class, which are held by a class of shareholders identified otherwise than by reference to their employment or directorships or their participation in a Schedule 4 CSOP scheme.

(2M) A takeover offer falls within this subsection if—

(a) it relates to the relevant company, and

(b) where there is more than one class of share in the relevant company, the class or classes to which it relates is or include the class of the shares acquired by the exercise of the option.

(2N) In subsections (2H), (2L) and (2M) “the relevant company” means the company whose shares are acquired by the exercise of the option.

(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) Paragraph 25 of Schedule 4 provides for the exercise of an option where the holder has died.

No charge in respect of post-acquisition benefits

525

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tax charge

Charge where option granted at a discount

526

(1) This section applies if, at the time when the share option is granted to the individual, the aggregate of—

(a) the amount or value of any consideration given by the individual for the grant of the option, and

(b) the amount payable by the individual, on exercising the option, in order to acquire the maximum number of shares that may be acquired under it,

is less than the market value of the same quantity of issued shares of the same class.

(2) The amount of the difference counts as employment income of the individual for the relevant tax year.

(3) The “relevant tax year” is the tax year in which the option is granted to the individual.

(4) Section 480(4) (gain realised on acquisition of securities pursuant to option etc) provides for a deduction to be made to take account of amounts that count as employment income under this section.

Chapter 9 — Enterprise management incentives

Introduction

Enterprise management incentives: qualifying options

527

(1) This Chapter provides—

(a) for share options notified to an officer of Revenue and Customs to be qualifying options for the purposes of the EMI code, and

(b) for exemptions and reliefs from income tax in connection with qualifying options.

(2) Schedule 5 contains the requirements that have to be met for a share option to be a qualifying option, together with the notification procedure.

(3) The provisions of—

(a) this and the following sections of this Chapter, and

(b) Schedule 5, ...

together constitute “the EMI code”.

(4) In the EMI code—

“qualifying option” means a share option—in relation to which the requirements of Schedule 5 are met at the time when the option is granted, andwhich is notified to an officer of Revenue and Customs in accordance with Part 7 of that Schedule;

“replacement option” means an option within paragraph 41(4) of that Schedule (grant of replacement option in connection with company reorganisations);

“share option” means a right to acquire shares in a company;

and any reference to the requirements of Schedule 5 is to the requirements set out in paragraph 1(3) of that Schedule.

(5) Other expressions used in the EMI code and contained in the index at the end of Schedule 5 have the meaning indicated by the index.

Tax advantages: receipt of option

No charge on receipt of qualifying option

528

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tax advantages: exercise of option

Scope of tax advantages: option must be exercised within 10 years

529

(1) Sections 530 to 540 apply in connection with the exercise of a qualifying option.

(2) But those sections only apply in cases where the option is exercised on or before the tenth anniversary of—

(a) the date of the grant of the option, or

(b) if it is a replacement option, the date of the grant of the original option.

(3) In the EMI code “the original option” means—

(a) where there has been one replacement option, the option that that option replaced, or

(b) where there have been two or more replacement options, the option that the first of them replaced.

No charge on exercise of option to acquire shares at market value

530

(1) This section applies if the option is to acquire shares at not less than their market value—

(a) at the time when the option is granted, or

(b) if it is a replacement option, at the time when the original option was granted.

(2) If this section applies, no liability to income tax arises by virtue of section 476 (charge on exercise etc. of option by employee) in respect of the exercise of the option.

(3) This section has effect subject to section 532 (modified tax consequences following disqualifying events).

Limitation of charge on exercise of option to acquire shares below market value

531

(1) This section applies if the option is to acquire shares at less than their market value—

(a) at the time when the option is granted, or

(b) if it is a replacement option, at the time when the original option was granted,

or at nil cost.

(2) If this section applies, the section 476 gain is—

$$CMV-(ACO+ACS)$where—CMV is the chargeable market value,ACO is the amount or value of the consideration given for the grant of the option, andACS is the amount, if any, for which the shares are acquired.$

(3) “The chargeable market value” means—

(a) the market value of the shares—

(i) at the time when the option was granted, or

(ii) if it is a replacement option, at the time when the original option was granted, or

(b) the market value of the shares at the time when the option is exercised,

whichever is lower.

(3A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) In this section “the section 476 gain” means the amount under section 478 (amount of charge under section 476) is to be regarded as the taxable amount for the purposes of section 476 in respect of the acquisition of the shares pursuant to the option.

(5) This section has effect subject to section 532 (modified tax consequences following disqualifying events).

Tax advantages where disqualifying events

Modified tax consequences following disqualifying events

532

(1) This section applies where—

(a) a disqualifying event (see section 533) occurs in relation to a qualifying option before the option is exercised, and

(b) the option is exercised later than 90 days after the day on which the event occurred.

(2) If the option is within section 530(1) (option to acquire shares at market value), the section 476 gain is—

$PEG-ACO$

(see subsection (4)).

(3) If the option is within section 531(1) (option to acquire shares at less than market value), the section 476 gain is—

$(CMV+PEG)-(ACO+ACS)$

(see subsection (4)).

(4) For the purposes of subsections (2) and (3)—

ACO is the amount or value of the consideration given for the grant of the option,

ACS is the amount, if any, for which the shares are acquired,

CMV is the chargeable market value (as defined by section 531(3)), and

PEG is the post-event gain, that is the amount (if any) by which the market value of the shares at the time when the option is exercised exceeds their market value immediately before the disqualifying event.

(4A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(5) In subsections (2) and (3) “the section 476 gain” means the amount under section 478 (amount of charge under section 476) is to be regarded as the taxable amount for the purposes of section 476 in respect of the acquisition of the shares pursuant to the option.

(6) Nothing in the following provisions—

(a) subsections (2) and (3) above, or

(b) sections 530 and 531,

applies if the amount that counts as employment income by virtue of section 476 in respect of the exercise of the option would, in the absence of those provisions, be less than the amount that counts as such income as a result of those provisions.

Disqualifying events

533

(1) The following provisions deal with the events that are (or are to be treated as) disqualifying events in relation to a qualifying option—

(a) section 534 (events relating to the relevant company),

(b) section 535 (events relating to the employee), and

(2) In the provisions mentioned in subsection (1) “the employee” means the person holding the qualifying option and “the relevant company” means the company whose shares are the subject of the option (see paragraph 1(3) of Schedule 5).

Disqualifying events relating to relevant company

534

(1) The following events relating to the relevant company are disqualifying events in relation to a qualifying option—

(a) when the relevant company becomes a 51% subsidiary of another company;

(b) when the relevant company comes under the control of—

(i) another company, or

(ii) another company and any other person connected with that other company,

without becoming a 51% subsidiary of that other company;

(2) But where a replacement option has been granted, an event within subsection (1)(a) or (b) is not a disqualifying event in relation to the old option (see paragraph 41(2) of Schedule 5) if the event occurs at any time during the period—

(a) beginning at the same time as the period within which the replacement option had to be granted (see paragraph 42 of Schedule 5), and

(b) ending with the release of the rights under the old option.

(3) A disqualifying event is to be treated as occurring in relation to a qualifying option if the circumstances mentioned in subsection (4) arise.

(4) The circumstances are that—

(a) the relevant company was a qualifying company at the time when the option was granted as a result only of preparations to carry on a qualifying trade; and

(b) either—

(i) the preparations cease to be carried on, or

(ii) the initial period comes to an end,

without the relevant company (or, if it is a parent company, any member of the group) beginning to carry on that qualifying trade.

(5) “The initial period” means the period of two years after the date when the option was granted.

(6) Paragraph 41(5)(b) of Schedule 5 has the effect that a replacement option is to be treated as granted on the date when the original option was granted.

(7) Subsection (1)(a) and (b) do not apply where the relevant company is subject to an employee-ownership trust (within the meaning of paragraph 27(4) to (6) of Schedule 2).

Disqualifying events relating to employee

535

(1) The following events relating to the employee are disqualifying events in relation to a qualifying option—

(a) when the employee ceases to be an eligible employee in relation to the relevant company as a result of ceasing to meet the requirement in paragraph 25 of Schedule 5 (the employment requirement);

(b) when the employee ceases to be such an employee as a result of ceasing to meet the requirement in paragraph 26 of that Schedule (the requirement as to commitment of working time).

(2) In addition, a disqualifying event is to be treated as occurring in relation to a qualifying option at the end of any tax year if, during that year, the average amount per week of the employee’s reckonable time in relevant employment was less than the statutory threshold.

(3) An employee’s “reckonable time in relevant employment” means the time which the employee in fact spent, as an employee in relevant employment—

(a) on the business of the relevant company, or

(b) if that company is a parent company, on the business of the group,

together with any time which the employee would, as such an employee, have spent on that business but for any of the reasons set out in paragraph 26(3)(a) to (d) of Schedule 5 (requirement as to commitment of working time).

(4) The “statutory threshold” means—

(a) 25 hours, or

(b) if less, 75% of the employee’s working time.

(5) For the purpose of applying subsection (2) to the tax year in which the option was granted, any part of that year which preceded the date on which it was granted is to be disregarded in calculating the average amount mentioned in that subsection.

(6) In this section—

(a) “relevant employment” means employment—

(i) by the relevant company, or

(ii) if that company is a parent company, by any member of the group;

(b) “working time” has the meaning given by paragraph 27 of Schedule 5 (meaning of “working time”).

Other disqualifying events

536

(1) The following are also disqualifying events in relation to a qualifying option—

(a) any variation of the terms of the option whose effect is either—

(i) to increase the market value of the shares that are the subject of the option, or

(ii) that the requirements of Schedule 5 would no longer be met in relation to the option;

(b) any alteration to the share capital of the relevant company—

(i) to which subsection (2) (share values affected by alteration of rights or restrictions) of section 537 applies, and

(ii) whose effect is that the requirements of Schedule 5 would no longer be met in relation to the option;

(i) subsection (2) (share values affected by alteration of rights or restrictions), and

(ii) subsection (3) (alteration designed to increase share values),

of section 537 apply;

(d) a conversion of any of the shares to which the option relates into shares of a different class, except in a case within section 538(2); and

(e) the grant to the employee of a relevant CSOP option, if immediately after it is granted the employee holds unexercised employee options in respect of shares with a total value of more than £250,000 .

(2) In subsection (1)(e)—

“relevant CSOP option”, and

“employee option”,

have the meaning given by section 539 (CSOP and other options relevant for purposes of this section); and sub-paragraphs (6) to (8) of paragraph 5 of Schedule 5 (determination of value of shares) apply for the purposes of subsection (1)(e) as they apply for the purposes of paragraph 5.

537

(1) This section has effect for the purposes of section 536(1)(b) and (c) (other disqualifying events: alterations of share capital of relevant company).

(2) This subsection applies to an alteration of the share capital of the relevant company if—

(a) the alteration affects (or but for the occurrence of some other event would affect) the value of the shares to which the option relates; and

(b) it consists of or includes—

(i) the creation, variation or removal of a right relating to any shares in the relevant company,

(ii) the imposition of a restriction relating to any such shares, or

(iii) the variation or removal of a restriction to which any such shares are subject.

(3) This subsection applies to an alteration of the share capital of the relevant company if the effect of the alteration is to increase the market value of the shares to which the option relates and either—

(a) it is not made by the relevant company for commercial reasons, or

(b) the main purpose (or one of the main purposes) for making it is to increase the market value of those shares.

(4) In this section any reference to—

(a) a restriction relating to shares or to which shares are subject, or

(b) a right relating to shares,

is a reference to such a restriction imposed or right conferred by any contract or arrangement or in any other way.

538

(1) This section has effect for the purposes of section 536(1)(d) (other disqualifying events: share conversions).

(2) A conversion of shares is not a disqualifying event if—

(a) it is a conversion of shares of one class only (“the original class”) into shares of one other class only (“the new class”);

(b) all the shares of the original class are converted into shares of the new class; and

(3) The conditions are—

(a) that immediately before the conversion the majority of the relevant company’s shares of the original class are held otherwise than by or for the benefit of—

(i) directors or employees of the relevant company,

(ii) an associated company of the relevant company, or

(iii) directors or employees of such an associated company;

(b) that immediately before the conversion the relevant company is employee-controlled as a result of holdings of shares of the original class.

(4) “associated company” has the meaning given by section 449 of CTA 2010,

“director” has the same meaning as in the benefits code (see section 67) but also includes a person who is to be or has been a director,

“employee” includes a person who is to be or has been an employee, and

“employee-controlled” has the same meaning as in Chapters 1 to 4 of this Part (see section 421H(1)).

CSOP and other options relevant for purposes of section 536

539

(1) This section has effect for the purposes of section 536(1)(e) (other disqualifying events: grant of CSOP option).

(2) A “relevant CSOP option” means a CSOP option granted to the employee by reason of the employee’s employment—

(a) with the employer company, or

(b) if it is a member of a group of companies, with any member of that group.

(3) A share option is an “employee option” if it is—

(a) the qualifying option mentioned in section 536(1), or

(b) another qualifying option granted to the employee by reason of the employee’s employment as mentioned in subsection (2)(a) or (b) above, or

(4) In this section a “CSOP option” means an option to acquire shares under a scheme which is a Schedule 4 CSOP scheme (see Schedule 4).

Tax advantages: taxable benefits

No charge on acquisition of shares as taxable benefit

540

(1) ... Chapter 3C of this Part (taxable benefits: notional loans in respect of acquisitions of shares) does not apply in relation to the acquisition of shares by the exercise of a qualifying option.

(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other income tax consequences

Effects on other income tax charges

541

(1) Nothing in the EMI code affects—

(a) the operation of Chapters 2 to 4 of this Part in relation to shares acquired under a qualifying option, or

(b) the operation of Chapter 5 of this Part otherwise than in relation to the acquisition of shares under a qualifying option.

(2) But in calculating the taxable amount for the purposes of section 426 (post-acquisition charge on restricted securities) in respect of shares acquired under a qualifying option, the amount of relief on the exercise of the option is to be regarded as a deductible amount for the purposes of section 428 (amount of charge).

(3) “The amount of relief on the exercise of the option” means the difference between—

(a) the amount that would have counted as employment income by virtue of section 476 in respect of the exercise of the option apart from the EMI code, and

(b) the amount (if any) that in fact counts as such income in accordance with the EMI code.

Exemption where offer made to both public and employees

Exemption: offer made to public and employees

542

(1) This section applies if—

(a) there is a genuine offer to the public of shares in a company at a fixed price or by tender,

(b) a director or employee of the company, or of another company or person, is entitled by reason of the office or employment to an allocation of the shares in priority to members of the public, and

(2) No liability to income tax in respect of earnings arises by virtue of any benefit derived by the director or employee from the entitlement.

(3) Condition A is that the aggregate number of shares subject to the offer that may be allocated as mentioned in subsection (1)(b) (“priority shares”) does not exceed—

(a) if the offer is part of arrangements which include one or more other offers to the public of shares of the same class, either of the limits in subsection (4), or

(b) in any other case, 10% of the shares subject to the offer (including the priority shares).

(4) The limits referred to in subsection (3)(a) are—

(a) 40% of the shares subject to the offer (including the priority shares), and

(b) 10% of all the shares of the class in question that are subject to any of the offers forming part of the arrangements (including the priority shares).

(5) Condition B is that all the persons entitled to an allocation of priority shares are entitled to it on similar terms (see section 546).

(6) Condition C is that those persons are not restricted wholly or mainly to directors or to those whose remuneration exceeds a particular level.

(7) This section has effect subject to section 543 (discount not covered by exemption in this section).

Discount not covered by exemption in section 542

543

(1) This section applies if the total of—

(a) the price payable by the director or employee for the shares of the company allocated to the director or employee under the offer, and

(b) the amount or value of any registrant discount made to the director or employee in respect of the shares,

is less than the fixed price or the lowest price successfully tendered.

(2) Section 542(2) (exemption: offer made to public and employees) does not apply to the benefit (if any) represented by the difference.

Exemption where different offers made to public and employees

Exemption: different offers made to public and employees

544

(1) This section applies if—

(a) there is a genuine offer to the public of a combination of shares in two or more companies at a fixed price or by tender (“the public offer”),

(b) there is at the same time an offer (“the employee offer”) of shares, or of a combination of shares, in one or more, but not all, of those companies—

(i) to directors or employees of any of those companies, or of any other company or person, or

(ii) to those directors or employees and to other persons,

(c) any of those directors or employees is entitled by reason of the office or employment to an allocation of shares under the employee offer in priority to any allocation to members of the public under the public offer, and

(d) conditions A to C are met.

(2) No liability to income tax in respect of earnings arises by virtue of any benefit derived by the director or employee from the entitlement.

(3) Condition A is that for each company whose shares are subject to the employee offer, the aggregate number of shares subject to that offer that may be allocated as mentioned in subsection (1)(c) (“priority shares”) does not exceed—

(a) if the public offer and the employee offer are part of arrangements which include one or more other offers to the public of shares in the company of the same class, either of the limits in subsection (4), or

(b) in any other case, 10% of the shares in the company that are subject to the public offer or the employee offer (including the priority shares).

(4) The limits referred to in subsection (3)(a) are—

(a) 40% of the shares in the company that are subject to the public offer or the employee offer (including the priority shares), and

(b) 10% of all the shares in the company of the class in question that are subject to any of the offers forming part of the arrangements (including the priority shares).

(5) Condition B is that all the persons entitled to an allocation of priority shares are entitled to it on similar terms (see section 546).

(6) Condition C is that those persons are not restricted wholly or mainly to directors or to those whose remuneration exceeds a particular level.

(7) This section has effect subject to section 545 (discount not covered by exemption in this section).

Discount not covered by exemption in section 544

545

(1) This section applies if the total of—

(a) the price payable by the director or employee for the shares of a company allocated to the director or employee under the employee offer, and

(b) the amount or value of any registrant discount made to the director or employee in respect of the shares,

is not the same as, or as near as reasonably practicable to, the appropriate notional price for the shares of the company.

(2) Section 544(2) (exemption: different offers made to public and employees) does not apply to the benefit (if any) represented by the amount by which the appropriate notional price exceeds the total referred to in subsection (1).

(3) The “appropriate notional price” for the shares of a company is—

(a) if subsection (4) applies, the amount given by the formula in subsection (6), and

(b) in any other case, the notional price.

(4) This subsection applies if shares of the company are subject to the public offer and there is a difference between CP and AFP—

(a) CP being the price for the combination of shares subject to the public offer determined by aggregating the notional prices for each one of the shares comprised in the combination, and

(b) AFP being the actual fixed price or (as the case may be) the lowest successfully tendered price for that combination of shares.

(5) The “notional price” for the shares of a company is the price that might reasonably have been expected to be the fixed price for the shares of the company under a separate offer of those shares if—

(a) the shares of the company, and of each of the other companies had, instead of being subject to the public offer and the employee offer, been subject to separate offers to the public in respect of each company at fixed prices, and

(b) those separate offers had been made at the time at which the public offer was in fact made.

(6) The formula referred to in subsection (3)(a) is—

$$NP×AFPCP$where—NP is the notional price for the shares of the company, andAFP and CP have the same meanings as in subsection (4).$

Supplementary provisions

Meaning of being entitled “on similar terms”

546

(1) This section applies for the purposes of sections 542(5) and 544(5) (condition that entitlements to allocation of priority shares must be on similar terms).

(2) The fact that different provision is made for persons according to—

(a) the levels of their remuneration,

(b) the length of their service, or

does not mean that they are not entitled to an allocation on similar terms.

(3) The fact that the allocations of shares in a company to which non-company employees are entitled are smaller than those to which company employees are entitled does not mean that they are not entitled on similar terms, if conditions A and B are met.

(4) Condition A is that each non-company employee is also entitled by reason of the office or employment and in priority to members of the public, to an allocation of shares in another company or companies which are offered to the public at a fixed price or by tender at the same time as the shares in the company.

(5) Condition B is that in the case of each non-company employee the aggregate value of all the shares included in the allocations to which the non-company employee is entitled is the same, or as nearly the same as is reasonably practicable, as that of the shares in the company included in the entitlement of a comparable company employee.

(6) For the purposes of subsection (5), the value of shares is to be measured by reference to the fixed price or the lowest price successfully tendered.

(7) In this section—

“company employee”, in relation to a company, means a director or employee of the company, and

“non-company employee”, in relation to a company, means a director or employee of another company or person.

Meaning and amount or value of “registrant discount”

547

(1) For the purposes of this Chapter there is a “registrant discount” in respect of the shares of a company if conditions A to C are met.

(2) Condition A is that members of the public who comply with such requirements as may be imposed in connection with the offer or, if section 544 applies, the public offer are, or may become, entitled to a discount in respect of the whole or part of the shares of the company allocated to them.

(3) Condition B is that at least 40% of the shares of the company allocated to members of the public are allocated to individuals who are or become entitled to—

(a) the discount, or

(b) some other benefit of similar value for which they may elect as an alternative to the discount.

(4) Directors and employees who are entitled by reason of their office or employment to an allocation of the shares in priority to members of the public are not to be treated as members of the public for the purposes of subsection (3).

(5) Condition C is that subscribing employees are, or may become, entitled to the same discount in respect of the shares of the company as any other members of the public to whom shares of the company are allocated under the offer.

(6) In subsection (5) a “subscribing employee” means a director or employee who—

(a) subscribes for shares—

(i) if section 542 (offer made to public and employees) applies, under the offer as a member of the public, or

(ii) if section 544 (different offers made to public and employees) applies, under the public offer as a member of the public or under the employee offer as a director or employee, and

(b) complies (or, in the case of a requirement to register, is taken under the terms of the offer to comply) with the requirements mentioned in subsection (2).

(7) For the purposes of this Chapter, the “amount or value” of any registrant discount made to a director or employee means—

(a) the amount of any such discount made to the director or employee as is mentioned in subsection (5), or

(b) the value of any such other benefit as is mentioned in subsection (3)(b) which is conferred on the director or employee as an alternative to the discount.

Minor definitions

548

(1) In this Chapter—

“director” means—in relation to a company whose affairs are managed by a board of directors or similar body, a member of that body,in relation to a company whose affairs are managed by a single director or similar person, that director or person, andin relation to a company whose affairs are managed by the members themselves, a member of the company, andincludes any person in accordance with whose directions or instructions the directors of the company (as defined in paragraphs (a) to (c)) are accustomed to act and a person who is to be, or has ceased to be, a director (as so defined);

“employee” includes a person who is to be or has been an employee;

“shares” includes stock;

“the employee offer” and “the public offer” have the meanings given by section 544(1).

(2) For the purposes of subsection (1) a person is not to be regarded as a person in accordance with whose directions or instructions the directors of the company are accustomed to act merely because the directors act on advice given by that person in a professional capacity.

(3) References in this Chapter—

(a) to the employment, in relation to an employee, are to the employment of that employee, and

(b) to the office, in relation to a director, are to the office of that director.

Chapter 11 — Supplementary provisions about employee benefit trusts

Introduction

Application of this Chapter

549

(1) This Chapter applies for the purposes of any listed provision in circumstances where—

(a) an individual (“B”) is interested as a beneficiary of an employee benefit trust in shares or obligations of a particular company (“the company”), and

(b) the question arises under that provision whether the trustees of the trust are, as a result of B’s being so interested, to be regarded as associates of B’s for the relevant purposes.

The relevant purposes are those of the operation, in relation to the company, of the “no material interest” requirement contained in the Schedule to this Act in which the listed provision appears.

(2) In this Chapter “listed provision” means any of the following provisions (under which trustees of an employee benefit trust are not to be regarded as associates if specified limits relating to share ownership are not exceeded)—

(a) paragraph 23(2) of Schedule 2 (... SIPs),

(b) paragraph 15(2) of Schedule 3 (... SAYE option schemes),

(d) paragraph 32(2) of Schedule 5 (enterprise management incentives).

(3) The general effect of this Chapter is that if the provisions of—

(a) sections 552 and 553 (attribution of interest in company to beneficiary or associate), or

(b) section 554 (attribution of further interest),

apply in relation to B or an associate of B's, B or the associate is to be treated for the purposes of the listed provision as having been the beneficial owner of a particular percentage of the company’s ordinary share capital on a particular date.

(4) In this Chapter, in relation to an individual, “associate”—

(a) has the meaning given by section 448 of CTA 2010 (close companies: meaning of “associate”), but

(b) does not include the trustees of an employee benefit trust as a result only of the individual’s having (as mentioned in subsection (1)(a)) an interest in shares or obligations of the company which are subject to the trust.

(5) In this Chapter “employee” means the holder of a taxable employment under Part 2 (as defined in section 66(3)), and accordingly includes an office-holder whose office is within the scope of that definition as a result of section 5(1).

Employee benefit trusts

Meaning of “employee benefit trust”

550

(1) In this Chapter “employee benefit trust”, in relation to a company, means a trust where conditions A and B are met.

(2) Condition A is that all or most of the employees of the company are eligible to benefit under the trust.

(3) Condition B is that after 13th March 1989 either—

(a) there has been no disposal of any of the property subject to the trust, or

(b) any disposal of any of that property was a disposal within subsection (4).

(4) The disposals within this subsection are—

(a) disposals in the ordinary management of the trust, or

(b) qualifying disposals (within the meaning given by section 551).

(5) In this section and section 551 “disposal” means disposal by sale, loan or otherwise.

“Qualifying disposals” for purposes of section 550

551

(1) For the purposes of section 550 (meaning of “employee benefit trust”) a “qualifying disposal” is a disposal of property consisting of—

(a) any of the ordinary share capital of the company, or

(b) money paid outright,

where any of conditions 1, 2 and 3 is met.

(2) Condition 1 is that the property has been applied for the benefit of—

(a) individual employees or former employees of the company,

(b) spouses or civil partners , former spouses or civil partners , widows or widowers or surviving civil partners of employees or former employees of the company,

(d) relatives, or spouses or civil partners of relatives, of persons within paragraph (a) or (b).

(3) In subsection (2) each reference to the company includes a reference to a company controlled by the company.

(4) Condition 2 is that the property has been applied for charitable purposes.

(5) Condition 3 is that the property has been transferred to—

(a) the trustees of another employee benefit trust,

(b) the trustees of a qualifying employee share ownership trust (within the meaning of Schedule 5 to FA 1989), or

(c) the trustees of a profit sharing scheme approved under Schedule 9 to ICTA (approved share option schemes and profit sharing schemes).

(6) In this section “relative” means—

(a) parent, child or remoter relation in the direct line, or

(b) brother, sister, uncle, aunt, nephew or niece.

Attribution of interests in company

Attribution of interest in company to beneficiary or associate

552

(1) This section applies if—

(a) after 13th March 1989 B, or an associate of B's, has received a payment (“the relevant payment”) from the trustees of the employee benefit trust, and

(b) at any time during the period of 3 years ending with the day on which the relevant payment was received (“the payment date”), the property subject to the trust consisted of or included any part of the ordinary share capital of the company.

(2) In such a case B or the associate is to be treated for the purposes of the listed provision as having been the beneficial owner of the appropriate percentage of the ordinary share capital of the company on the payment date.

(3) This is in addition to any percentage of that share capital of which B or the associate was actually the beneficial owner on that date.

(4) Section 553 explains what is meant by “the appropriate percentage”.

Meaning of “appropriate percentage” for purposes of section 552

553

(1) For the purposes of section 552 “the appropriate percentage” is—

$$P×100D$where P and D have the meaning given by the following provisions.$

(2) Unless subsection (3) applies, P is the aggregate of the relevant payment and any other payments received by B or associates of B’s from the trustees of the trust during the period of 12 months ending with the payment date.

(3) If—

(a) any distributions were made to the trustees of the trust by the company in respect of its ordinary share capital during the period of 3 years ending with the payment date, and

(b) the aggregate of those distributions is less than the aggregate mentioned in subsection (2),

P is the aggregate of those distributions.

(4) Unless subsection (5) applies, D is the amount determined as follows—

Step 1

Calculate the aggregate of—

(a) any distributions made by the company in respect of its ordinary share capital during the period of 12 months ending with the payment date,

(b) any distributions so made during the period of 12 months immediately preceding that mentioned in paragraph (a), and

Step 2

Divide the aggregate so calculated by the number of the periods mentioned in paragraphs (a) to (c) in which distributions were so made.

(5) If no distributions were so made during any of those periods, D is 1.

(6) In this section “the payment date” and “the relevant payment” have the meaning indicated in section 552(1).

Attribution of further interest in company

554

(1) This section applies if—

(a) B or an associate of B’s is (apart from this section) to be treated by virtue of section 552(2) as having been the beneficial owner of a percentage of the ordinary share capital of the company as a result of receiving the relevant payment from the trustees of an employee benefit trust, and

(b) B or an associate of B’s has, during the period of 12 months ending with the payment date, received one or more payments from the trustees of any other employee benefit trust or trusts connected with the company.

(2) In such a case section 552 applies to B or (as the case may be) the associate mentioned in subsection (1)(a) as if B or the associate had received—

(a) any payment from the trustees of a trust as mentioned in subsection (1)(b), or

(b) where more than one payment has been received from the trustees of a trust, the last of the payments,

on the payment date.

(3) B or the associate is accordingly to be treated for the purposes of the listed provision as having been the beneficial owner on the payment date of both—

(a) the percentage of the ordinary share capital of the company mentioned in subsection (1)(a), and

(b) the appropriate percentage of that share capital as determined in accordance with subsection (2).

(4) This is in addition to any percentage of that share capital of which B or the associate was actually the beneficial owner on that date.

(5) For the purposes of this section a trust is “connected with” the company if, at any time during the period of 3 years ending with the payment date, the property subject to the trust consisted of or included any part of the ordinary share capital of the company.

(6) In this section “the payment date” and “the relevant payment” have the meaning indicated in section 552(1).

Part 8 — Former employees: deductions for liabilities

Deductions in calculating net income

Former employee entitled to deduction from total income

555

(1) This Part applies if—

(a) a former employee makes a deductible payment, or

(b) a former employer makes a deductible payment on behalf of a former employee and the payment is treated—

(i) as a relevant retirement benefit, or

(ii) as post-employment earnings,

of the former employee.

(2) A deduction of the amount of the deductible payment may be made in calculating the former employee's net income for the tax year in which the payment is made (see Step 2 of the calculation in section 23 of ITA 2007).

(3) Subsection (2) applies only if the former employee makes a claim to the deduction.

(4) The entitlement to a deduction under this section is subject to sections 556 and 557.

(5) For the application of this Part in relation to former office-holders, see section 564.

(6) See section 263ZA of TCGA 1992 for relief from capital gains tax where the amount of the deduction allowed under this section exceeds the remaining total income (as defined in that section).

Deductible payments made outside the time limits allowed

556

(1) No deduction may be made under section 555 if the deductible payment is made—

(a) on or before the day on which the former employee ceased to hold the former employment, or

(b) after the end of the sixth tax year following the tax year in which the former employee ceased to hold the former employment.

(2) If subsection (1)(a) applies, see section 346 (deduction for employee liabilities).

Deductible payments wholly or partly borne by the former employer etc.

557

(1) This section applies if—

(a) a deductible payment is made by the former employee (and not by the former employer on behalf of the former employee), but

(b) the whole or a part of the cost of making the payment is borne—

(i) by the former employer, or

(ii) out of the proceeds of a contract of insurance.

(2) No deduction of the amount of the cost borne as mentioned in subsection (1)(b) (the “relevant amount”) may be made under section 555.

(3) But this is subject to subsection (4) if the whole or a part of the relevant amount is treated—

(a) as a relevant retirement benefit of the former employee, or

(b) as post-employment earnings of the former employee.

(4) In such a case, a deduction of so much of the relevant amount as is treated in that way may be made under section 555.

Interpretation

Meaning of “deductible payment”

558

(1) For the purposes of this Part each of the following is a deductible payment—

A. Payment in or towards the discharge of a liability related to the former employment.

B. Payment of any costs or expenses incurred in connection with—

(a) a claim that the former employee is subject to a liability related to the former employment, or

(b) proceedings relating to or arising out of a claim that the former employee is subject to a liability related to the former employment.

BA Payment of any costs or expenses not falling within paragraph B which are incurred in connection with the former employee giving evidence about matters related to the former employment in, or for the purposes of—

(a) a proceeding or other process (whether or not involving the former employee), or

(b) an investigation (whether or not likely to lead to any proceeding or other process involving the former employee).

BB Payment of any costs or expenses not falling within paragraph B or BA which are incurred in connection with a proceeding or other process, or an investigation, in which—

(a) acts of the former employee related to the former employment, or

(b) any other matters related to the former employment,

are being or are likely to be considered.

C. Payment of a premium under a qualifying insurance contract, but only to the extent that the premium relates to—

(a) provision in the contract for the former employee to be indemnified against a payment falling within paragraph A, or

(b) provision in the contract for the payment of any costs or expenses falling within paragraph B , BA or BB .

(2) But a payment which falls within paragraph A B, BA or BB is not a deductible payment if it would have been unlawful for the former employer to enter into a contract of insurance in respect of the liability, or costs or expenses, in question.

(3) In this Part—

(a) “premium”, in relation to a qualifying insurance contract, means an amount payable to the insurer under the contract, and

(b) where a qualifying insurance contract relates to more than one person, employment or risk, the part of the premium to be treated as relating to each of them is to be determined by apportionment on a just and reasonable basis.

(4) In this section and section 560—

(a) “acts” includes failures to act and acts are “related to the former employment” if the former employee was acting—

(i) in the employee's capacity as holder of the former employment, or

(ii) in any other capacity in which the former employee was acting in the performance of the duties of that employment,

(b) “giving evidence” includes making a formal or informal statement or answering questions,

(c) “proceeding or other process” includes any civil, criminal or arbitration proceedings, any disciplinary or regulatory proceedings of any kind and any process operated for resolving disputes or adjudicating on complaints, and

(d) references to a proceeding or other process or an investigation include a reference to a proceeding or other process or an investigation that is likely to take place.

559

For the purposes of this Part each of the following kinds of liability is related to the former employment— A. Liability imposed upon the former employee because he did an act, or failed to do an act—

(a) in his capacity as holder of the former employment, or

(b) in any other capacity in which he acted in the performance of the duties of the former employment.

Meaning of “qualifying insurance contract”

560

(1) In section 558 “qualifying insurance contract” means a contract of insurance which meets conditions A, B, C and D.

(2) Condition A is that, so far as the risks insured against are concerned, the contract only relates to one or more of the following—

(a) the indemnification of a former employee against a liability related to the former employment,

(b) the indemnification of a person against vicarious liability in respect of a liability related to another person’s employment,

(i) in connection with a claim that a person is subject to a liability to which the insurance relates, or

(ii) in connection with any proceedings relating to or arising out of a claim that a person is subject to a liability to which the insurance relates,

(ca) the payment of costs or expenses incurred in connection with a former employee giving evidence about matters related to the former employment in, or for the purposes of—

(i) a proceeding or other process (whether or not involving the former employee), or

(ii) an investigation (whether or not likely to lead to any proceeding or other process involving the former employee).

(cb) the payment of any costs or expenses incurred in connection with a proceeding or other process, or an investigation, in which—

(i) acts of a former employee related to the employment, or

(ii) any other matters related to the former employment of a former employee,

are being or are likely to be considered,

(d) the indemnification of an employer against loss from a payment made by the employer to a former employee in respect of—

(i) a liability related to the former employment, or

(ii) any costs or expenses incurred as mentioned in paragraph (c) , (ca) or (cb) .

(3) Condition B is that—

(a) the period of insurance under the contract does not exceed 2 years or, if it does, it does so only because of one or more renewals, each for a period of 2 years or less, and

(b) the insured is not required to renew the contract for any period.

(4) Condition C is—

(a) that the insured is not entitled under the contract to receive any payment or other benefit in addition to—

(i) cover for the risks insured against, and

(ii) any right to renew the contract, or

(b) if the insured is so entitled, that the part of the premium reasonably attributable to the entitlement is not a significant part of the whole premium.

(5) Condition D is that the contract is not connected with another contract.

Connected contracts

561

(1) An insurance contract is connected with another contract for the purposes of section 560 if conditions E and F are met—

(a) at the time when both contracts are first in force, or

(b) at any time after that time.

(2) Condition E is that one of the contracts was entered into—

(a) by reference to the other, or

(b) with a view to enabling or facilitating entry into the other on particular terms.

(3) Condition F is that the terms on which one of the contracts was entered into are significantly different from what they would have been if—

(a) it had not been entered into in anticipation of the other being entered into, or

(b) the other had not also been entered into.

(4) If—

(a) there is only one such significant difference in terms, and

(b) the contracts meet conditions A, B and C specified in section 560,

the difference may be disregarded in the following cases.

(5) The first case is where the difference is a reduction in premiums under the contract that is reasonably attributable only to the contract—

(a) containing a right to renew, or

(b) being entered into by way of renewal.

(6) The second case is where—

(a) two or more contracts have been entered into as part of a single transaction, and

(b) the difference is reductions in their premiums that are reasonably attributable only to the premium under each of them having been fixed by reference to the appropriate proportion of the combined premium.

(7) In subsection (6) “the combined premium” means the amount that would have been the total premium under a single contract relating to all the risks covered by the contracts.

Meaning of “former employee” and “employment”

562

(1) In this Part “former employee” means an individual who has ceased to hold an employment.

(2) In this Part “employment” includes in particular—

(a) any employment under a contract of service,

(b) any employment under a contract of apprenticeship, and

“Employee” and “employer” have corresponding meanings.

Other interpretation

563

In this Part each of the following expressions, when used in relation to a former employee, has the meaning given—

“former employment” means the employment which the former employee has ceased to hold;

“former employer” means—the person under whom the former employee held the former employment,a person for the time being carrying on the whole or any part of the business or other undertaking for the purposes of which the former employee held the former employment,a person who is for the time being subject to any of the liabilities with respect to that business or other undertaking of the person mentioned in paragraph (a), anda person who is connected with a person falling within paragraph (a), (b) or (c);

“post-employment earnings” means so much of any amount received after the former employee has ceased to hold the former employment as constitutes general earnings for the purposes of the employment income Parts;

“relevant retirement benefit” means a benefit— which is received by the former employee under an employer-financed retirement benefits scheme, and which, under Chapter 2 of Part 6, counts as employment income of the former employee.

Application of this Part to office-holders

564

(1) The provisions of this Part are expressed to apply to former employees but they apply equally to former office-holders.

(2) In those provisions as they apply to a former office-holder—

(a) references to holding a former employment are to holding the office;

(b) “former employment” means the office held;

(3) In this Part “office” includes in particular any position which has an existence independent of the person who holds it and may be filled by successive holders.

Part 9 — Pension income

Chapter 1 — Introduction

Structure of Part 9

565

The structure of this Part is as follows— Chapter 2—

(a) imposes the charge to tax on pension income, and

(b) provides for deductions to be made from the amount of income chargeable;

Chapter 2 — Tax on pension income

Nature of charge to tax on pension income and relevant definitions

566

(1) The charge to tax on pension income under this Part is a charge to tax on that income excluding any exempt income.

(2) “Pension income” means the pensions, annuities and income of other types to which the provisions listed in subsection (4) apply.

This definition applies for the purposes of the Tax Acts.

(3) “Exempt income” means pension income on which no liability to income tax arises as a result of any provision of Chapters 15A to 18 of this Part.

This definition applies for the purposes of this Part.

(4) These are the provisions referred to in subsection (2)—

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Income Tax (Earnings and Pensions) Act 2003

PAYE

Modification of section 696 where charge on shares ceasing to be subject to plan

509

Payments by trustees to employer company on shares ceasing to be subject to plan

510

PAYE deductions to be made by trustees on shares ceasing to be subject to plan

511

Disposal of beneficial interest by participant

512

Capital receipts: payments by trustees to employer company

513

Capital receipts: PAYE deductions to be made by trustees

514

Other tax consequences

Tax advantages and charges under other Acts

515

Chapter 7 — ... SAYE option schemes

Introduction

Approved SAYE option schemes

516

Share options to which this Chapter applies

517

Tax advantages

No charge in respect of receipt of option

518

No charge in respect of exercise of option

519

No charge in respect of post-acquisition benefits

520

Chapter 8 — ... CSOP schemes

Introduction

Approved CSOP schemes

521

Share options to which this Chapter applies

522

Tax advantages

No charge in respect of receipt of option

523

No charge in respect of receipt of option

524

No charge in respect of post-acquisition benefits

525

Tax charge

Charge where option granted at a discount

526

Chapter 9 — Enterprise management incentives

Introduction

Enterprise management incentives: qualifying options

527

Tax advantages: receipt of option

No charge on receipt of qualifying option

528

Tax advantages: exercise of option

Scope of tax advantages: option must be exercised within 10 years

529

No charge on exercise of option to acquire shares at market value

530

Limitation of charge on exercise of option to acquire shares below market value

531

Tax advantages where disqualifying events

Modified tax consequences following disqualifying events

532

Disqualifying events

533

Disqualifying events relating to relevant company

534

Disqualifying events relating to employee

535

Other disqualifying events

536

Alterations of share capital for purposes of section 536

537

Share conversions excluded for purposes of section 536

538

CSOP and other options relevant for purposes of section 536

539

Tax advantages: taxable benefits

No charge on acquisition of shares as taxable benefit

540