EIM45435 - Employment income provided through third parties: exclusions: earmarking for employee share option schemes: specified exit events: overview and conditions
Section 554M ITEPA 2003
The Section 554M exclusions: introduction
Section 554M exclusion for actual grants
Section 554M exclusion for expected grants
Connection with tax avoidance arrangement
The trustee of an employee share option scheme may earmark shares to meet its commitments. This will be a step within section 554B which, if the other statutory conditions are met, will take the arrangement through the section 554B gateway.
But this step will not give rise to Part 7A income if all the conditions of section 554M are met.
Section 554M is an exclusion for employee share option schemes which have specified exit events.
This page explains the section 554M conditions and sets out the section 554M exclusions in detail.
Conditions
Section 554M can only apply if B is a company.
An employee share option scheme needs to meet the 5 conditions in section 554M(1)(a) to (e) if it is to come within section 554M.
Section 554M(1)(a)
There is an arrangement (바카라 사이트˜B바카라 사이트™s employee share option scheme바카라 사이트™) under which, in respect of A바카라 사이트™s employment with B, a right (바카라 사이트˜a relevant share option바카라 사이트™) may be granted to A:
- to acquire 바카라 사이트˜relevant shares바카라 사이트™ which are not units in a collective investment scheme, or
- to receive a sum of money the amount of which is to be determined by reference to the market value of any such relevant shares at the time the sum is paid
On 바카라 사이트˜relevant shares바카라 사이트™, see EIM45480. But note that, although 바카라 사이트˜relevant shares바카라 사이트™ in sections 554J to 554M can include units in a collective investment scheme, in section 554M(1)(a) it cannot.
It does not matter whether the grant may be made by B or by some other person.
Note that 바카라 사이트˜relevant share option바카라 사이트™ has a wide meaning. For example, it is capable of covering a long term incentive plan under which A will be awarded shares automatically at a future date if specified conditions are met.
Section 554M(1)(b)
The main purpose of the grant of the relevant share option would not be the provision of relevant benefits.
바카라 사이트˜Relevant benefits바카라 사이트™ has the same meaning as in Part 6 Chapter 2 ITEPA 2003 (EFRBS), except that, here, 바카라 사이트˜relevant benefits바카라 사이트™ can include benefits charged to tax under Part 9 ITEPA 2003 (pension income). See EIM15021.
Section 554M(1)(c)
There are 2 possibilities.
The first possibility is that the relevant shares would be shares (including stock) in:
- a company the business of which consists wholly or mainly in the carrying on of a trade, or
- a company which controls such a company
The second possibility is that the relevant shares would be instruments which meet 2 conditions.
First, they are debt instruments to be precise, securities for the purposes of Part 7 Chapters 1 to 5 ITEPA 2003 within section 420(1)(b) ITEPA 2003 (see ERSM20140).
Second, they are issued by:
- a company the business of which consists wholly or mainly in the carrying on of a trade, or
- a company which controls such a company
Section 554M(1)(d)
The grant would be on terms (바카라 사이트˜the deferred grant terms바카라 사이트™) the main purpose of which is to ensure that A cannot exercise the relevant share option unless:
- a specified exit event occurs, or
- an exit event within a specified description occurs
On the 바카라 사이트˜exercise바카라 사이트™ of options, see EIM45460.
On 바카라 사이트˜exit events바카라 사이트™, see EIM45465.
If A exercises the relevant share option early, see EIM45440 (in particular, cases 1 and 2).
Section 554M(1)(e)
As at the time the grant is made, there would be a reasonable chance that:
- the specified exit event will occur, or
- an exit event within a specified description will occur.
The section 554M exclusions: introduction
If the arrangement meets the conditions in section 554M(1), 2 exclusions are available. They are very similar. One relates to actual grants. The other relates to expected grants.
If a relevant step comes within either of the section 554M exclusions, it does not give rise to Part 7A income.
Section 554M exclusion for actual grants
To come within the section 554M exclusion for actual grants, a relevant step must meet the 7 conditions in section 554M(2). These conditions are bulleted below:
- the relevant step is within section 554B
- but for section 554M, the relevant step would give rise to Part 7A income
- the subject of the relevant step is relevant shares (바카라 사이트˜the earmarked shares바카라 사이트™) which are earmarked (or otherwise start being held) solely with a view to providing relevant shares pursuant to a relevant share option which has been granted and whose grant meets 2 conditions
- first, this grant is made to A as mentioned in section 554M(1)(a)
- second, this grant meets the requirements of section 554M(1)(b) to (e)
- E ≤ X, where
- 바카라 사이트˜E바카라 사이트™ is the number of any relevant shares of any type which are earmarked shares, and
- 바카라 사이트˜X바카라 사이트™ is the maximum number of relevant shares of that type which one might reasonably expect to be needed for providing shares pursuant to the grant
On 바카라 사이트˜the maximum number one might reasonably expect바카라 사이트™, see EIM45470.
On 바카라 사이트˜solely바카라 사이트™, see EIM45320.
- there is no connection (direct or indirect) between the relevant step and a tax avoidance arrangement. See EIM45855.
Section 554M exclusion for expected grants
To come within the section 554M exclusion for expected grants, a relevant step must meet the 7 conditions in section 554M(2). These conditions are bulleted below.
- the relevant step is within section 554B
- but for section 554M, the relevant step would give rise to Part 7A income
- the subject of the relevant step is relevant shares (바카라 사이트˜the earmarked shares바카라 사이트™) which are earmarked (or otherwise start being held) solely with a view to providing relevant shares pursuant to a relevant share option which is expected to be granted and whose grant meets two conditions
- First, this grant is expected to be made to A as mentioned in section 554M(1)(a).
- Second, if this grant is made, it will meet the requirements of section 554M(1)(b) to (e).
- E ≤ X, where
- 바카라 사이트˜E바카라 사이트™ is the number of any relevant shares of any type which are earmarked shares, and
- 바카라 사이트˜X바카라 사이트™ is the maximum number of relevant shares of that type which one might reasonably expect to be needed for providing shares pursuant to the expected grant.
On 바카라 사이트˜the maximum number one might reasonably expect바카라 사이트™, see EIM45470.
- There is no connection (direct or indirect) between the relevant step and a tax avoidance arrangement. See EIM45855.
Connection with tax avoidance arrangement
Ordinary commercial arrangements should pass the anti-avoidance test bulleted above.
But you must examine an arrangement critically, if it purports:
- to come within section 554M
- to defer tax liability beyond the statutory time limits
Such an arrangement may well fail the anti-avoidance test.
This is an illustrative example. The anti-avoidance test is broad. It may catch other avoidance transactions.
Section 554M: later events
If a section 554M exclusion prevents a relevant step from giving rise to Part 7A income, that is not the end of the story.
In special circumstances, there will be a fall-back charge on the final exercise date. See EIM45440.
A fall-back charge may apply if a relevant step comes within the section 554M exclusion for expected grants but the grant is delayed. See EIM45445.
There will be a fall-back charge if, broadly speaking, shares continue to be earmarked in circumstances in which the conditions for the exclusion are no longer met. See EIM45450.
In practice, taxpayers are likely to arrange their affairs so that none of these fall-back charges applies.