Finance Act 1998

50Conditional acquisition of shares

(1)After section 140 of the Taxes Act 1988 there shall be inserted the following sections—

“140AConditional acquisition of shares

(1)This section applies where—

(a)a beneficial interest in any shares in a company (“the employee”s interest') is acquired by any person (“the employee”) as a director or employee of that or another company; and

(b)the employee acquires that interest on terms that make his interest in the shares only conditional.

(2)If the terms on which the employee acquires the employee’s interest are such that his interest in the shares in question will or might continue to be only conditional until a time more than five years after his acquisition of the interest, tax shall be chargeable under Schedule E in respect of that interest on the basis that it is emoluments of the office or employment concerned.

(3)In any other case, there shall (subject to the following provisions of this section) be no tax chargeable on the employee under Schedule E in respect of his acquisition of the interest except any tax which is so chargeable by virtue only of section 135 or 162.

(4)If, in a case falling within subsection (2) or (3) above—

(a)the shares cease, without the employee ceasing to have a beneficial interest in them, to be shares in which the employee’s interest is only conditional, or

(b)the employee, not having become chargeable by virtue of this subsection in relation to the shares, sells or otherwise disposes of the employee’s interest or any other beneficial interest in them,

he shall, for the year of assessment in which they so cease, or in which the sale or other disposal takes place, be chargeable to tax under Schedule E on the amount specified in subsection (5) below.

(5)That amount is the amount (if any) by which the sum of the deductible amounts is exceeded by the market value of the employee’s interest immediately after that interest ceases to be only conditional or, as the case may be, at the time of the sale or other disposal.

(6)For the purposes of subsection (5) above the market value of the employee’s interest at any time is the amount that might reasonably be expected to be obtained from a sale of that interest in the open market at that time.

(7)For those purposes the deductible amounts are—

(a)the amount or value of the consideration given for the employee’s interest;

(b)any amounts on which the employee has become chargeable to tax under Schedule E in respect of his acquisition of the employee’s interest;

(c)any amounts on which the employee has, by reference to an event occurring not later than the time of the event by virtue of which a charge arises under this section, become chargeable to tax in respect of the shares under section 78 or 79 of the [1988 c. 39.] Finance Act 1988 (unapproved employee share schemes).

(8)Where the employee dies holding the employee’s interest this section shall have effect—

(a)as if he had disposed of that interest immediately before his death; and

(b)as if the market value of the interest at the time of that disposal were to be determined for the purposes of subsection (5) above on the basis-

(i)that it is known that the disposal is being made immediately before the employee’s death; and

(ii)that any restriction on disposal subject to which the employee holds the shares is to be disregarded in so far as it is a restriction terminating on his death.

(9)Any reference in this section or section 140B or 140C to shares in a company includes a reference to securities issued by a company; and the references in subsection (7)(c) above to an event include references to the expiry of a period.

140BConsideration for shares conditionally acquired

(1)This section applies in relation to any shares for determining the amount or value of the consideration referred to in section 140A(7)(a).

(2)Subject to the following provisions of this section, that consideration is any given by—

(a)the employee; or

(b)in a case where section 140H(1)(b) applies and the shares were acquired by another person, that other person,

in respect of the acquisition of an interest in the shares.

(3)The amount or value of the consideration given by any person for an interest in the shares shall include—

(a)the amount or value of any consideration given for a right to acquire those shares; and

(b)the amount or value of any consideration given for anything by virtue of which the employee’s interest in the shares ceases to be only conditional.

(4)Where any consideration is given partly in respect of one thing and partly in respect of another, the amount given in respect of the different things shall be determined on a just and reasonable apportionment.

(5)The consideration which for the purposes of this section is taken to be given wholly or partly for anything shall not include the performance of any duties of or in connection with the office or employment by reference to which the interest in the shares in question has been acquired by a person as a director or employee of a company.

(6)No amount shall be counted more than once in the computation of the amount or value of any consideration.

(7)Subsections (1) to (3) of section 136 shall apply for determining for the purposes of subsection (3)(a) above the amount or value of the consideration given for a right to acquire any shares as they apply for determining such an amount for the purposes of section 135.

140CCases where interest to be treated as only conditional

(1)For the purposes of sections 140A and 140B (but subject to the following provisions of this section) a beneficial interest in shares is only conditional for so long as the terms on which the person with that interest is entitled to it—

(a)provide that, if certain circumstances arise, or do not arise, there will be a transfer, reversion or forfeiture as a result of which that person will cease to be entitled to any beneficial interest in the shares; and

(b)are not such that, on the transfer, reversion or forfeiture, that person will be entitled in respect of his interest to receive an amount equal to or more than the amount that might reasonably be expected (if there were no provision for transfer, reversion or forfeiture) to be obtained from a sale of that interest in the open market at that time.

(2)A person shall not for the purposes of sections 140A and 140B be taken, in relation to any shares, to have an interest which is only conditional by reason only that, in a case where there is no restriction on the meeting of calls by that person, the shares—

(a)are unpaid or partly paid; and

(b)may be forfeited for non-payment of calls.

(3)A person shall not for the purposes of sections 140A and 140B be taken, in relation to any shares in a company, to have an interest which is only conditional by reason only that the articles of association of the company require him to offer the shares for sale if he ceases to be an officer or, as the case may be, employee of the company.

(4)A person shall not for the purposes of sections 140A and 140B be taken, in relation to any security, to have an interest which is only conditional by reason only that the security may be redeemed on payment of any amount.

(5)In subsection (1) above the references, in relation to the terms of a person’s entitlement, to circumstances arising include references—

(a)to the expiration of a period specified in or determined under those terms or the death of that person or any other person; and

(b)to the exercise by any person of any power conferred on him by or under those terms.”

(2)In section 77(1) of the [1988 c. 39.] Finance Act 1988 (application of Chapter about unapproved employee share schemes), after “Subject to” there shall be inserted “section 140A of the Taxes Act 1988 and”.

(3)After subsection (6) of section 79 of that Act (charge for shares in dependent subsidiaries) there shall be inserted the following subsection—

“(6A)If, before the time by reference to which the chargeable increase is determined, an event occurs by virtue of which the person making the acquisition becomes chargeable to tax under section 140A(4) of the Taxes Act 1988 (employee’s interest in shares ceasing to be only conditional) on any amount (“the charged amount”) in respect of the shares, the amount on which tax is chargeable by virtue of this section shall be reduced by the charged amount.”

(4)The preceding provisions of this section apply in relation to interests acquired on or after 17th March 1998.