Finance Act Signals New Tax Regime For Employee Equity Awards

by Amanda Banks, Tax-News.com, London

10 November 2003

Now that Royal Assent has been given to the 2003 Finance Act, new tax legislation will mean a change in the rules will apply where employees acquire shares in their employing company subject to forfeiture ('restricted shares'), according to financial advisors Cripps Portfolio.

“It is common practice for equity schemes to provide restricted shares that vest after an initial period, but with a further period of retention required before sale is permitted - typically 3 and 5 years”, says Cripps Director of Tax, Simon Dixon.

He continues: “The position had been that whilst no tax arose on the initial award of restricted shares, an income tax charge was levied at the point the shares vested, based on a discounted price allowing for the further two-year retention period. The value of the discount would have escaped tax altogether and any addition growth subject to capital gains.”

"Unsurprisingly, this loophole has been plugged", observes Mr Dixon. "Potentially there will be income tax charges at the initial vesting and at expiry of the final retention dates. The second additional income tax charge will effectively catch any discount applied at the initial discount and by reference to the potentially higher value of the shares at the second date."

"The new provisions may affect internationally mobile employees," explains Mr Dixon. "Previously, an award of share options made whilst an employee was UK-resident, but not exercised until the individual was working abroad could have escaped UK tax."

"Accordingly, options exercised by non-UK resident employees after Royal Assent may now be potentially chargeable to UK tax," warns Dixon.

The new rules apply retrospectively to all share awards made since 16 April 2003.

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