Income Tax (Earnings and Pensions) Act 2003

Tax charge

438 Charge on conversion of shares

(1) This section applies if, at a time when the employee has a beneficial interest in them, the shares are converted into shares of a different class in pursuance of an entitlement to convert them which has been conferred on the holder.

(2) The taxable amount determined under section 439 counts as employment income of the employee for the relevant tax year.

(3) The “relevant tax year” is the tax year in which the conversion occurs.

(4) This section is subject to—

• section 440 (case outside charge under this section: conversion of entire class), and

• section 441 (case outside charge under this section: acquisition of conditional interest).

439 Amount of charge

(1) The taxable amount for the purposes of section 438 (charge on conversion of shares) is—

MV - DA

where—

• MV is the market value of the shares into which the convertible shares are converted at the time of the conversion, and

• DA is the total of any deductible amounts.

(2) For the purposes of subsection (1) each of the following is a “deductible amount”—

(a) the amount or value of any consideration given for the convertible shares or for the interest in them;

(b) the amount or value of any consideration given for the conversion;

(c) any amount that constitutes earnings from the employee’s employment under Chapter 1 of Part 3 (earnings) in respect of the acquisition of the convertible shares or the interest in them;

(d) any amount that is treated as earnings from the employee’s employment under Chapter 8 of Part 3 (taxable benefits: notional loans in respect of acquisitions of shares) in respect of the acquisition;

(e) if the convertible shares were, or the interest in them was, acquired by the exercise of a share option, any amount that counts as employment income of the employee under section 476 (charge on employee on exercise etc. of option) in respect of the exercise; and

(f) if the convertible shares were, or the interest in them was, acquired through a series of conversions each of which was a taxable conversion, the taxable amount for each conversion, so far as not falling within paragraph (c), (d) or (e).

(3) If, not later than the conversion, an event occurred in respect of the shares by virtue of which an amount counts as employment income of the employee under—

(a) section 449 (charge on occurrence of chargeable event), or

(b) section 453 (charge on increase in value of shares of dependent subsidiary),

that amount is a “deductible amount” for the purposes of subsection (1).

(4) Section 541(2) (effects of the EMI code on other income tax charges) also provides that an amount is to be regarded as a “deductible amount” for the purposes of subsection (1).

(5) For the purposes of subsection (1) the “market value” of shares means the amount that might reasonably be expected to be obtained from a sale of the shares in the open market.

(6) In subsection (2) “taxable conversion” means a conversion which—

(a) resulted in an amount counting as employment income under section 438, or

(b) would have done so but for the fact that the market value of the shares at the time of the conversion did not exceed the sum of the deductible amounts.

(7) The reference in subsection (3) to an event includes the expiry of a period.

440 Case outside charge under section 438: conversion of entire class

(1) Section 438 (charge on conversion of shares) does not apply if—

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

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

(c) condition A or B is met.

(2) Condition A is that immediately before the conversion the majority of the company’s shares of the original class are not held by or for the benefit of—

(a) directors or employees of the company,

(b) an associated company of the company, or

(c) directors or employees of such an associated company.

(3) Condition B is that immediately before the conversion the company is employee-controlled by virtue of holdings of shares of the original class.

(4) A company is “employee-controlled” by virtue of holdings of shares of a class if—

(a) the majority of the company’s shares of that class (other than any held by or for the benefit of an associated company) are held by or for the benefit of employees or directors of the company or a company controlled by the company, and

(b) those directors and employees are together able as holders of the shares to control the company.

(5) In this section “associated company” has the meaning given by section 416 of ICTA.

441 Case outside charge under section 438: acquisition of conditional interest

(1) Section 438 (charge on conversion of shares) does not apply if the interest which the employee acquires in the shares into which the convertible shares are converted is an interest which is only conditional.

(2) “Only conditional” has the same meaning as in Chapter 2 of this Part (see section 424).