Part 7Employment income: share-related income and exemptions
Chapter 3Convertible shares
Introduction
435Application of this Chapter
1
This Chapter applies where a person (“the employee”)—
a
has acquired convertible shares or an interest in such shares in a company, and
b
did so as a director or employee of that or another company.
2
For the purposes of this Chapter shares are “convertible” if—
a
they confer on the holder an immediate or conditional entitlement to convert them into shares of a different class, or
b
they are held on terms that authorise or require the grant of such an entitlement to the holder if certain circumstances arise, or do not arise.
3
The references, in relation to the terms of a person’s entitlement, to circumstances arising include references to—
a
the expiry of a period specified in or determined under those terms,
b
the death of that or any other person, and
c
the exercise by any person of a power conferred on that person by or under those terms.
4
In this Chapter—
“the employer company” means the company as a director or employee of which the employee acquired the convertible shares or the interest in them, and
“the shares” means the shares mentioned in subsection (1)(a);
and “director” and “employee” have the extended meaning given by section 446(1).
436Shares acquired “as a director or employee”
1
For the purposes of this Chapter a person (“E”) acquires shares or an interest in shares “as a director or employee” of a company if E acquires the shares or interest in pursuance of—
a
a right conferred on, or opportunity offered to, E by reason of E’s office or employment as a director or employee of the company;
b
a right or opportunity assigned to E, having been conferred on or offered to some other person by reason of E’s office or employment as a director or employee of the company; or
c
an assignment, the shares or interest having been acquired by some other person by reason of E’s office or employment as a director or employee of the company.
2
The references in subsection (1) to a right or opportunity conferred or offered by reason of E’s office or employment include—
a
one so conferred or offered after E has ceased to hold the office or employment, and
b
one that arises from the fact that shares—
i
which E acquired as a director or employee (or is treated as so acquiring by virtue of this paragraph), or
ii
in which E so acquired an interest,
were convertible shares.
3
A person who—
a
has acquired an interest in shares which is only conditional, convertible shares or an interest in convertible shares,
b
acquired that interest or those shares as a director or employee of a company, or is treated by virtue of this subsection as having done so, and
c
as a result of any two or more transactions—
i
ceases to be entitled to that interest or those shares, and
ii
becomes entitled to another interest in shares which is only conditional or to any convertible shares or to an interest in convertible shares,
is to be treated for the purposes of this Chapter as if the interest or shares mentioned in paragraph (c)(ii) were also acquired as a director or employee of the company.
4
Subsection (3) also applies where the interest or shares mentioned in subsection (3)(c)(ii) were acquired by a person connected with the first-mentioned person.
5
Nothing in subsection (3) or (4) affects the rights or opportunities included by virtue of subsection (2)(b).
6
In this section “an interest in shares which is only conditional” has the same meaning as in Chapter 2 of this Part (conditional interests in shares) (see section 424 and the definition of shares in section 434(1)).
437Cases where this Chapter does not apply
1
This Chapter does not apply where a person has acquired convertible shares or an interest in such shares as a director or employee of a company if the earnings from the office or employment in question were not (or would not have been if there had been any) general earnings to which section 15 or 21 applies (earnings for year when employee resident and ordinarily resident in the UK).
2
This Chapter does not apply by virtue of section 436(2)(a) (right or opportunity conferred or offered after person has ceased to hold office or employment) if it would not apply if the right or opportunity had been conferred or offered in the last tax year in which the office or employment was held.
Tax charge
438Charge 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).
439Amount of charge
1
The taxable amount for the purposes of section 438 (charge on conversion of shares) is—
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.
440Case 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.
441Case 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).
Supplementary provisions
442Amount or value of consideration given for shares or conversion
1
This section applies for the purposes of section 439 (amount of charge) in determining the amount or value of the consideration given for the convertible shares, or for the interest in them, or for the conversion.
2
Subject to the following provisions of this section, the consideration given for the convertible shares, or for the interest in them, is any consideration given in respect of the acquisition by—
a
the employee, or
b
if section 436(1)(c) applies, the person by whom the shares were, or interest was, acquired.
3
The amount or value of the consideration given by a person for shares, or an interest in shares, includes the amount or value of any consideration given for a right to acquire the shares or interest.
4
If 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 is to 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 does not include the performance of any duties of, or in connection with, the office or employment by reference to which the shares or interest in question have been acquired by a person as a director or employee of a company.
6
No amount is to be counted more than once in calculating the amount or value of any consideration.
443Amount or value of consideration given for right to acquire shares
1
This section applies for the purposes of section 442(3) in determining the amount or value of any consideration given for a right to acquire shares.
2
Subsection (3) applies if the right to acquire shares (“the new option”) is the whole or part of the consideration for the assignment or release of another right to acquire shares (“the old option”).
3
The amount or value of the consideration given for the new option is to be treated as being the sum of—
a
the amount by which the amount or value of the consideration given for the grant of the old option exceeds the amount or value of any consideration for the assignment or release of the old option, apart from the new option, and
b
any valuable consideration given for the grant of the new option, apart from the old option.
4
Two or more transactions are to be treated for the purposes of subsection (2) as a single transaction by which a right to acquire shares is assigned for a consideration which consists of or includes another right to acquire shares if—
a
the transactions result in—
i
a person ceasing to hold a right to acquire shares, and
ii
that person or a connected person coming to hold another right to acquire shares, and
b
one or more of the transactions is effected under arrangements to which two or more persons who hold rights to acquire shares, in respect of which there may be liability to tax under Chapter 5 of this Part (share options), are parties.
5
Subsection (4) applies regardless of the order in which the assignment and the acquisition occur.
6
In this section “release” includes agreeing to the restriction of the exercise of the right.
444Conversion in consequence of employee’s death
1
Subsection (2) applies if—
a
the employee dies holding an interest in convertible shares,
b
those shares are converted into shares of a different class either on, or within 12 months after, the death, and
c
the conversion takes place wholly or partly as a consequence of the death.
2
This Chapter applies as if the conversion had taken place immediately before the death and had been in pursuance of an entitlement to convert conferred on the deceased.
445Duty to notify conversions of shares
1
Subsection (2) applies if—
a
a person has provided an individual with convertible shares in a company, or an interest in such shares,
b
those shares are subsequently converted into shares of a different class, and
c
the circumstances are such that the conversion results or may result in an amount counting as employment income of that individual under section 438 (charge on conversion of shares).
2
Each of the following persons—
a
the person who provided the shares or interest, and
b
the employer company,
must provide the Inland Revenue with particulars in writing of the shares and their conversion.
3
The particulars must be provided before 7th July in the tax year following that in which the conversion takes place.
446Minor definitions
1
In this Chapter—
“director”—
- a
in the case of a company whose affairs are managed by a board of directors or similar body, means a member of that board or similar body,
- b
in the case of a company whose affairs are managed by a single director or similar person, means that director or person,
- c
in the case of a company whose affairs are managed by its members, means a member,
and includes any person who is to be or has been a director;
- a
“employee” includes—
- a
in relation to a company, a person taking part in the management of the affairs of the company who is not a director, and
- b
a person who is to be or has been an employee;
- a
“shares” (except in section 436 in the expression “an interest in shares which is only conditional”) includes stock and any other interest of a member of a company;
“terms” on which a person holds shares or an interest in shares means terms imposed by contract or arrangement or in any other way.
2
In this Chapter—
“the employee”,
“the employer company”, and
“the shares”,
have the meaning indicated in section 435(1) and (4).