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Forthcoming changes to the tax treatment of employment-related share acquisitions by internationally-mobile employees (“IMEs”)

The rules for calculating the amounts on which IMEs are chargeable to income tax on employment-related securities will change from 6 April 2015. A new Chapter 5B of Part 2, ITEPA 2003 replaces Chapter 5A, sections 421E (exclusions: residence, etc) and 474 (cases where Chapter 5, Part 7, does not apply) are repealed and changes are made to Chapters 2 (restricted securities), 3C (acquisition at an undervalue) and 5 (securities options) of Part 7.

Very broadly, the effect is that all employees are brought within the scope of charges to income tax under Chapters 1-5, Part 7 ITEPA 2003. Chapter 5B of Part 2 will have effect to determine what portion of income within Part 7 (“SI”) is taxable in the UK. If, in relation to any part of the ‘relevant period’, the “international mobility conditions” are met (see [26.2C]), any part of such securities income which is foreign is treated as “FSI”. Taxable specific income (per s10) is SI – FSI, plus any part of FSI which is ‘chargeable foreign securities income’ and is remitted. New s41G applies to determine ‘the relevant period’. The underlying intention is understood to be to identify, and bring into charge to income tax, securities income in a manner which is broadly equivalent to that used to identify chargeable general earnings, and which is consistent with OECD principles. There is however provision for adjustment to a period which is ‘just and reasonable’ – see below.

In the case of restricted and convertible shares, the relevant period is that from the day of acquisition to the chargeable event. In the case of share options, it is the period from the date of grant to the date of ‘vesting’ or, if earlier, the chargeable event. “Vesting” has a specific meaning of ‘becoming capable of immediate exercise, or exercisable save only for the expiry of a period of time’. So, for example, an option is vested for these purposes at a given time if, at that time, performance targets have been met but it cannot be exercised until, say, the third anniversary of the date of grant; but it would not be “vested” if such future exercise remains conditional upon continuing employment.

Securities income is treated as accruing equally over each day of the relevant period. A UK charge, on an arising basis, is based on the UK duties performed in the relevant period. Any necessary apportionment is not prescribed as having to be calculated by reference to numbers of calendar days, although it is understood that HMRC expects a split by reference to UK and overseas workdays to be the method most commonly adopted. However, any method which gives a just and reasonable result will be accepted. If the resulting amounts of chargeable and non-chargeable FSI are not just and reasonable, then it is open to the taxpayer and his or her employer to adjust to what is ‘;just and reasonable’. This might, for example, be in consequence of an inappropriate ‘relevant period’, breaks in duties or an uneven distribution of duties over a number of separate years.

If the employee is non-UK resident by reason of the application of a double-tax treaty, the time- apportionment rules set by the treaty will take precedence.

Visit out page on international share schemes for more information.