When an employee obtain shares by reason of his employment, and he pays less than market value for those shares, it is very likely that there will be a charge to Income Tax. The relevant legislation which imposes the charge is found in ITEPA Part 7.
Berg Kaprow Lewis LLP notes that when an employee comes to sell shares that he has acquired by reason of his employment, he can reasonably expect that he will get some sort of relief from CGT for the amount on which he has paid Income Tax.
Example
Mr Employee subscribes £100 for shares in his employer at a time when they are worth £10,000. He will expect to pay Income Tax on £9,900. If he subsequently sells those shares for £10,000 he will not expect to pay any CGT.
However, Berg Kaprow Lewis notes that Mr Employee may be disappointed. It is quite possible, if the opportunity to acquire shares does not meet the definition of an “option” (and, generally speaking, a simple invitation to subscribe for shares will not), that there is no offset against CGT for the amount charged to Income Tax.
The reason for this policy is unclear, but it appears to be a point that the Revenue do take (see CG 56390). To make matters even more arbitrary, the law differs according to whether shares are or are not “restricted” securities.
The firm suggests that anyone possibly affected should ensure that any income tax charge on acquisition of shares arises through the exercise of something that counts as an “option”. Relief against CGT is then available by statute for the amount charged to tax.
